Understanding your credit score: credit pulls

A credit score is part of your credit history—a number the credit reporting agencies assign to a person, organization or business that indicates their ability to repay a loan. It reflects your credit patterns over time considering five important factors weighted by how much each factor impacts your score:

• 35% - Payment history (Do you pay your bills on time?)

• 35% - Credit utilization (How much of your available credit are you using?)

• 10% - Length of credit history (How long have you had credit?)

• 10% - Credit mix (Have you had different types of credit; e.g. credit cards, auto loans and mortgages?)

• 10% - New credit (Have you applied for credit in the last 12 months?)

For most people, consistent attention to the payment history and credit utilization factors is enough to build a good credit score. Together they make up a whopping 70% of your score. If you’re already doing that and you still want to improve your credit, it’s time to pay attention to the length of credit history, credit mix and new credit factors.

Length of credit history

Length of credit history is a measurement of how long each of your accounts has been open, and the length of time since the account’s most recent action. To protect the length of your credit history, simply refrain from canceling credit cards and lines of credit that you’ve held for many years, and use those from time to time.

Credit mix

The credit mix factor looks at how many types of credit you have. For a good credit score, you may want to build a credit history that includes different types of loans. For instance, if you’re financing college on a credit card, consider a student loan. If you intend to put your big vacation on a card, think about a signature loan. Each of these loan types will contribute to your credit mix and may strengthen your score.

New credit

The new credit factor looks at how much credit you’ve applied for “recently.” Recently means within the prior 6-12 months, depending on the credit reporting agency’s algorithm.

When you get a new loan, two things happen. Your credit utilization factor may improve because you have just added more available credit, but your new credit factor may degrade slightly because your loan application triggered what’s known as a “hard pull.” By applying for the loan, you are authorizing the lender to review your credit report to determine your creditworthiness. This is called a credit inquiry or “pull,” because someone is pulling information from the credit reporting agencies. There are two types of credit pulls: hard and soft.

Soft pull: A soft pull is a credit inquiry where your credit is not being reviewed by a potential lender. Many actions can initiate a soft pull, including checking your own credit. A soft credit pull will not affect your credit score.

Hard pull: A hard pull is an inquiry from a potential lender who is reviewing your history because you’ve applied for credit with them. It’s this hard pull that might impact your credit score, but not by much. Remember, it only makes up 10% of your score.

Hard pulls are mainly associated with applying for credit cards, mortgages and loans, but one could be triggered when you apply for a new cell phone contract or utility service, a housing rental contract, or even when you put a rental car on a debit card. If you’re concerned, ask the vendor if they’re going to do a hard credit pull.

Managing hard credit pulls

For most people, a single hard pull probably won’t impact your credit score. If it does, the impact is typically minimal, fewer than five points, and is partially offset by the resulting increase in available credit which can improve your credit utilization factor. But if your credit score isn’t good and you’re trying to optimize it prior to applying for a large loan, you may want to avoid multiple hard pulls in a short period of time because that could lower your score.

There is an exception built into the system to allow for rate shopping on mortgages, auto loans and student loans. The credit reporting agencies consider inquiries for the same type of loan within a 45-day period as a single credit inquiry. So do look for the best rate, but complete your search within 45 days.

A hard pull can have a greater impact on your score if you’re new to credit and thus have only a few credit accounts and a brief credit history. If that describes you, and you’re looking at applying for a large loan like a mortgage within the next six months, it might be wise to refrain from applying for any other credit until the loan closes. Be especially careful about those in-store credit card offers that promise a discount on that day’s purchases. A one-time discount on a purchase can’t compare to the long-term benefits of a better credit score.

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