Periodically I notice re-occurring questions about the impact on this and other investor sites. As somebody with 14 years of experience in credit risk management, I thought I would write something that will hopefully clarify what impact inquiries have on credit file and Beacon score.
Every time you apply for a credit card, mortgage, new mobile telephone, car loan, etc., you give lenders permission to pull your credit bureau file information, which in turn creates a credit inquiry.
Lenders report those to the credit bureaus, and credit bureaus return the favour by letting all other lenders know what your credit appetite is.
The more credit inquiries you generate in a short period of time, like 6 months or 12 months, the closer you are to being viewed as a `credit seeker`. That raises a RED FLAG for lenders!!!!!
Oleg
Every time you apply for a credit card, mortgage, new mobile telephone, car loan, etc., you give lenders permission to pull your credit bureau file information, which in turn creates a credit inquiry.
Lenders report those to the credit bureaus, and credit bureaus return the favour by letting all other lenders know what your credit appetite is.
The more credit inquiries you generate in a short period of time, like 6 months or 12 months, the closer you are to being viewed as a `credit seeker`. That raises a RED FLAG for lenders!!!!!
- 1 or 2 inquiries will not raise concern;
- 3 or 4 will draw some attention to what kind of credit you are seeking
Credit bureaus provide a code to illustrate the type of credit you are interested in ` be it mortgages, car loans, credit cards, etc.
So if they see that your 3 inquiries were all for a mortgage or a car loan within a very short period of time (say 1 month), they often attribute it to `shopping for the best interest rate`, and count these as one inquiry. This rule does not apply if the mortgage inquiries were made in different months!
Once you clinch 5 or more credit inquiries in 6 months, you will win a title of a credit seeker
- in the eyes of the financial institutions, and they will look at you under the microscope.
While the exact Beacon score weights are proprietary, here is my guesstimated price of being a Credit Curious George:
0-2 inquiries in last 6 months ` negligible impact (no more than 10 points)
3-4 inquiries in last 6 months ` some impact (could be up to 20 points)
5+ inquiries in last 6 months ` noticeable impact (20 to 50 points)
Another fact to be aware of is that some credit scoring models lenders use count the number of new trade lines opened recently (6 months or 12 months). The more credit cards and loans you obtained recently, the more points you will lose off your credit score! Talk about a double dip`
Investors beware! In Canada, mortgages, for the most part, do not appear as trade lines on your credit file, so you safe!
How does this play out when buying Real Estate?
If you have a solid credit file with Beacon score of 760, and you bought 3 properties over the last 6 months, generating 3 inquiries, you can continue planning your new acquisitions confidently.
However, if you have Beacon score of 650, and in the last 6 months you obtained 3 new credit cards, a car loan, and a brand new mobile phone with Rogers, you might not be able to qualify for a mortgage on that rental property.
Some suggestions:
- Apply for credit only when necessary
If you buy multiple properties in a short period of time, review your credit file with your mortgage broker to ensure the bank will continue saying `Yes`
If you are applying for a mortgage with a financial institution where you already have an established relationship (VISA, MasterCard, mortgage, loan, etc.), ask if they can make a `soft inquiry`. (Periodically they refresh your credit bureau information anyway, without it counting towards your inquiries. Known as a soft inquiry, it won`t impact you!)
Oleg