I’ve written a number of articles on credit scoring, and the different components of the score including the Average Age of Your Credit Lines, the Amount of your Credit Utilization, and the Number of Cards you have. Today, let’s take a brief look at the impact of credit inquiries.
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Wow, Joe, a “C”? Yup, “C”. This is a snapshot from my credit report card at Credit Karma, and while my overall score is 770 today, it will go a bit higher as we get closer to mid-2013. In mid-2011, I received a solicitation to refinance a rental property I own. The fee was small, and no paperwork was required, but of course, an inquiry to my credit report. In November, 2011, I refinanced my main mortgage, dropping the rate from 5-1/4% to 3-1/2%, and even with some closing costs, the break even was less than 6 months. Shortly after, the same back sent me a credit card offer, zero interest for a year, and a crazy introductory perk I’ll write about next week. Too good to pass up, but it created one more inquiry.
The interesting thing is that scoring is about averages, not motives. When I am a serial refinancer, lowering my rate every two or three years, I may be saving a lot of money, but this aspect of the score is impacted. We bought our house in 1996 and the rate was 7.625%, it’s now less than half that, and our balance is half of we started at. Note, a normal amortization has a balance of 75% the starting value when halfway through a 30 year mortgage. The current mortgage isn’t 30 years, it’s 15.
Same with those who move from card to card. By cancelling old cards and applying for new ones, you impact both the average age of you credit, and produce more hard inquiries on your report. I’m not obsessed with the score, just intrigued at its calculation. I’m at the point in my life where I doubt I’ll ever have another mortgage, when we sell the house we’re in, we’ll buy the final house with cash. I’m still a sucker for cards with crazy offers such as zero percent or high cash back, but that story is for next week.
I just went on a credit card rewards grabbing spree, and hitup about 10 credit cards in the course of a day. Then two days later I decided it was time to refinance my house. I’ve had the same banker for a long time, so I explained to him what I did, he said it hadn’t hurt my credit score very much, but they did make me go through a big deal of paperwork explaining which cards I applied for, why, how much credit they gave me and how much balance on had on each one. It was a pain, but the cash I made off the rewards more than outweighed it.
As the graphic shows, the weighting is low, but of course, what you did impacts average card age as well. FICO scoring is a funny game, and you seem to have done fine. I was just sure not to pull any stunts before my last refi went through. Thanks for the visit and comment!