The Better Credit Blog

In the following article I will explain how credit report inquiries can modestly lower your credit score. Depending on the type of inquiry, your score can lower 3 - 10 points -even more with multiple inquiries. While this should not be the pinnacle of your credit worries, it is helpful information to keep in mind.

What is an inquiry?

As the name suggests, a credit inquiry is the nomenclature used when anyone pulls your credit report for review. There are two main types of inquiries: inquiries that are only seen by you, and inquiries that are seen by everyone who reviews your credit report. Only the latter affects your credit score.

While multiple inquiries make a bigger impact on your credit score, multiple inquiries within the same 2-week period are usually only counted as one inquiry. The credit bureaus started doing this after customers started to complain that their scores were dropping 20 - 30 points in one weekend of car shopping (often when you are seeking financing for a new car, dealerships will make 20+ inquiries).

This brings forth an important tip: when you are seeking credit (filling out credit card applications, for example), do it in “bursts”. If you are going to apply for 5 credit cards, minimize the credit score impact by doing it all on the same day and then waiting a couple of months (if you have no success the first time) to do it again. Multiple credit inquiries indicates to credit bureaus that you are desperately in need of credit because you cannot honor your current obligations. This is why they lower your score.

Types of inquiries that do not affect your score

1. Pulling your own credit report is not seen by anyone but you.
2. Inquiries for pre-approval offers such as those “You’ve been pre-approved!” letters you get in the mail.
3. SOME credit inquiries made by debt collectors.

Types of inquiries that do affect your score

1. Inquiries made by creditors when you apply for credit.
2. Inquiries made by cell phone companies when you apply for a cellphone.
3. Car dealerships inquiries.
4. Other misc. credit applications (such as a home loan).

Hopefully this gives you a better idea of how inquires work. I know I did not list every type of inquiry that can affect your credit score. My attempt is to simply give you a list in which will provide a general rule of thumb to go from.

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Hello Ryan,
I mailed your negotiation letter a couple of weeks ago through certified mail. I got the green slip on Monday, but my credit report hasn’t been updated yet. Should I be worried? I haven’t sent them any money.
Thanks
Kenny

Kenny -
You sent them a negotiation letter and you expect them to update your credit report, yet you haven’t paid them anything? Here is how it works, once again Kenny: You send negotiation letter. They send you a letter back saying they are willing (or not) to negotiate. You pay them what you offered. They update your credit report AFTER you pay. This process takes months. Chill.

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Student loan creditors such as Nelnet are required by law to report accurate information to credit agencies. This makes dealing with late or defaulted student loans much different than other accounts. Basically, regardless of if you have consolidated, or even undergone a rehab program, the record will remain on your credit report for 7 years.

Please see: http://www.ed.gov/policy/highered/leg/hea98/HR6.pdf for the specific legal mumbo jumbo.

Most other accounts CAN be negotiated

…if you go about it the correct way. I wrote a whole article about the best way to do this. Go here to read about negotiating charge offs, derogatory, late, and a bunch more.

Independent Thought

During difficult times a loan spent in the right way can make things a lot better. A loan spent unwisely will become a curse later. These days banking loans see your credit worthiness before issuing any loans. Bad credit rated people can get secured loans though they require some kind of collateral. If you have accumulated numerous student loans, you should think about getting a consolidated loan. That will make life a little bit easier.

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Often I am asked whether I recommend a secured credit card over a high interest rate credit card for people in the process of fixing their bad credit. The short answer is that I recommend a secured credit card. However, it should be stated that I will only recommend a secured credit card if the provider will do one thing: withhold that the card is secured from the credit agencies. A secured credit card recorded as such will not improve your credit very much –in some cases it can even hurt it.

Luckily, through the wonders of competition, there are very few card providers still out there that will record a secured credit card as secured. As a matter of fact, you will likely find that most secured credit card providers will openly advertise that they do not report the card as secured. This is a big selling point.

How much can I expect my credit to improve?

You can expect your credit to improve substantially if you haven’t had any credit card activity on your account for awhile (ex., if your credit card accounts have been closed or noted as charge offs.). Remember: having positive, recent credit activity is a very important factor in determining your credit score. Simply cleaning up your credit history and removing bad accounts will alone only help your credit score so much.

Secured credit cards require an initial deposit before they will open the account, (i.e., before they will “secure” that deposit). Every provider has their own minimum deposits, but you’ll be looking at around $200 - $300 to start out with. Orchard Bank’s secured card, which I recommend, have a minimum deposit of $200. It’s important not to simply deposit $200 and start using the card. Why? Because a credit card with a $200 balance will do little to improve your credit score.

This will, in fact, hurt your credit if you have other cards with higher balances. Therefore, it’s best to increase the limit whenever you can –deposit another $100, for example, when you have the extra money. This will increase the credit limit recorded on your credit report. After you have had the secured credit card for a year, call them and ask if they are willing to switch it over to unsecured. Most of the time, (if your payments have been good), they are more than happy to make the switch and give you an increased credit limit.

Secured credit card tips

1. Make sure the provider reports to all 3 credit bureaus and they don’t annotate that the card is secured.
2. Be ready to make an initial deposit and keep depositing to increase your credit limit. This is what will increase your credit score.
3. Keep the card for at least a year before requesting that it be switched to unsecured and your credit limit be increased.

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If you have read my previous articles, you might be saying to yourself, “Ok Ryan, you are giving me all this advice on how to fix my credit score and negotiate with the credit bureaus –are you assuming that I have the money to negotiate with? How do I pay off my bills?” This question is broad and, of course, specific to your individual life situation. Nonetheless, I can tell you with close to absolute certainty that in most cases individuals tend to label ‘paying off bills’ wretchedly more difficult than it can actually be.

Have you ever asked a friend that question? “Bob, how do you suppose I ought to go about paying off all of these suffocating bills?” Likely he would give you a little demeaning grin and respond with something like, “Self-discipline, my friend, you need to get your priorities straight. Hell, get another job!” Perhaps Bob is right, but Bob is too general in his evaluation. In a more specific tone I will tell you the same thing. The key to paying off bills (without having to get another job) is, of course, to change the method in which you spend money during an average day. Average day spending is where most of your money goes. It’s likely that you don’t realize how much this “little stuff” adds up. I didn’t until I started tracking it. If you want to pay off your bills, here is what you gotta do:

1. Use personal finance software, such as Quicken, to track your purchases. I started by using Quicken to enter everything I bought. If I went to 7-11 and bought a bag of chips and a drink, I’d keep the receipt and at the end of the day enter it in. The power of software such as Quicken is that they allow you to ‘categorize’your purchases. Therefore, at any given time, I can see how much money I am spending on any particular item; food, gas, magazine subscriptions, etc. After a short amount of time, you will begin to see your spending trends.
2. Create a rough budget in order to have some sort of spending ceiling. You don’t have to change your spending too much yet. Personal finance software make this really easy. I created a budget by noting all of my reoccurring bills (phone, internet, electric) and then estimating how much I spend on “variables” such as food, gas, and entertainment.
3. Stick with this budget for a couple of months and you will naturally begin to better monitor your spending.
4. Look over the spending categories in your personal finance software and find ways to reduce your overall spending in that particular category. The key is reducing your spending for a particular category. For example, if upon evaluating your spending, you see that you spend $500 per month on food –begin researching ways to reduce this. More than likely you can easily reduce that to $350 - $400 (this is an example of course.)
5. Implement a new budget based on what measures you have taken to reduce a particular category’s expense.

Hopefully you are beginning to see how well this can work. It works well because humans are exceptional experts at grouping things. If you were to simply go about reducing your spending by, for example, telling yourself, “Ok, I will no longer drink a cup of Starbucks coffee every morning”, you would soon feel as though you are missing out of something you once had. When you begin to feel this way, you become discouraged and give up. In contrast, when you categorize everyday items that you purchase, you look for ways to rearrange and revaluate their importance.

The above methods are extremely powerful –it will blow your mind. Tracking your spending through the use of categories can save you hundreds a month and you’ll likely find yourself wanting to live frugally.

‘Frugal Living’ Resources

Once you have identified categories that you can potentially save money on, the next step is to get online and find ways to reduce that category’s budget. We will use the food example I explored earlier because everyone buys food (and everyone can save a ton of cash on it too). There are a bunch of blogs that offer advice on how to save money on food (and everything else for that matter). My favorite frugal living blog is Get Rich Slowly. Surf through their forums and see how other people save money on food. It is particularly interesting (and helpful) to see how much other people with similar family sizes spend on food as well.

Now you can pay off debt and bills

If you follow the steps I outlined above, most likely you’ll find yourself with a couple extra hundred bucks a month. Use this money to pay down debts, negotiate with creditors, or pay off bills. If you are committed and willing to allocate a few moments a day to recording your purchases, you will acquire a newfound appreciation for money and you will also develop positive financial habits that will bring you wealth and happiness for years to come.

Take home points:

1. Purchase personal finance software and track your purchases.
2. Create a budget and group purchases into categories
3. Evaluate your overall spending in particular categories
4. Go online and look for ways to rearrange and revaluate purchases within a category to save money.
5. Use the extra money each month to pay whatever it is that needs to be paid so you can improve your credit.

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