by Bradley Streeter

Created on: August 01, 2008   Last Updated: June 22, 2009

The loan application process does lower a potential borrower's credit score, but this shouldn't discourage the pursuit of credit for important investments and purchases. Although the exact formula for determining a FICO score is proprietary, and therefore not required to be made public knowledge, consumer advocates have been able to provide a good estimate of the relative impact of certain financial factors on credit scores. The hierarchy of factors, listed in descending order, is 1) payment history, 2) the ratio of credit balances to available credit, 3) credit history (how long have you had credit with each lender), 4) credit inquiries and 5) types of credit (installment or revolving, secured or unsecured, major bank or store credit).

For those with good payment histories and low balances relative to limits, applying for loans is definitely not the end of the world. It is estimated that individual credit inquiries lower a consumer's FICO score by about five points, not very significant on an 850 point scale. It is also known that several inquiries within days of one another and for similar purposes do not have a cumulative impact on the credit score. Furthermore, the impact of credit inquiries on the FICO score is short term, showing up for approximately six months to a year. By applying for credit only when absolutely necessary, a consumer can minimize the damage done by credit inquiries to the point of virtual elimination.

While it is important for consumers to remain vigilant over their credit scores, it would be impractical to avoid credit inquiries completely. Besides, what good is a perfect credit score if you never attempt to use it? Building a business and investing are only successful through taking on calculated risk. Carefully considered opportunities should not be avoided over the irrational fear that merely asking the bank for help will forever ruin your financial prospects.

Although credit inquiries do lower credit scores, the impact is minimal and can be nearly completely avoided by the wise consumer. Applying for loans should be done only when necessary. There is nothing wrong with shopping around for the best credit terms, but related inquiries should be made within quick succession of one another. By rationally approaching the decision to obtain a loan, the negative impacts of the credit-seeking process can be greatly diminished.

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