Pre Approval Effect On FICO Score

Will a Pre Approval Hurt My Credit or Effect My FICO Score?

This is a super-logical question to ask. The frank answer is …… it’s really the least of your worries! And since you’re (hopefully) not really worried, per se, let’s rephrase that to: “it shouldn’t really be even a small, if any, concern for you.”  You’re about to fry some much bigger fish.

A FICO score is a predictor of financial failure. Right or wrong, fair or not, biased or unbiased, it is universally accepted and is an integral gear in the machinery of the home buying process (try to finance a home without a FICO score and you’d be plotting a new course through an unknown jungle). 

Financing a home with No Credit, or with locked credit bureaus and you’ll be 10x’ing your efforts or doubling your cost of financing … or maybe both.

Even though the Fair Isaac Company (FICO) grounds and proves itself through statistics, probabilities, and historical performance there is a logical nature to the score too. For instance, a borrower with very little debt-load would be without an incentive to file bankruptcy. Yet a consumer going on a credit shopping binge could be the harbinger to a lit waxed fuse.

Here’s a compressed explanation of credit inquiries.

When a company buys a consumer credit report (with a score) they need advance permission and a valid (permissible) purpose. Each credit pull (inquiry) leaves behind a “fingerprint”.

The fingerprint identifies the company and possibly a department within that company. A large bank will have many identifiers based on branch location and type of credit product being applied for (credit card, auto loan, overdraft, mortgage or HELOC are all examples). Inside of the fingerprint is additional coding. The coding shows the purpose of the inquiry. Is the bank “checking up” on how an existing client is paying their other bills? (that’s called account monitoring). Is the bank making a blanket prescreened offer to customers who meet a certain profile? (prescreened offer) or did the consumer initiate a request for credit? (apply for a mortgage pre-approval for example).

The industry classification (there are over 170 classifications for “types” of credit inquiries) and type of inquiry add weight to the fingerprints effect on your score. 

It wouldn’t be correct to “ding the score” for the ability to check on a current client’s status. And you’ll agree that multiple inquiries at a furniture rental store and electronics box stores represent a different risk than inquiries through a landlord or mortgage company. 

A mortgage department or company should be set up to pull a “mortgage industry” credit report. Let’s consider this a safe inquiry with a net-neutral effect on your FICO score. On the other hand, frantically shopping for an unsecured credit card would leave other types of inquiries on your report and lead to multiple 3 point dings. 

While the credit inquiries stay visible on your credit report for up to two years, the effect on the score (of certain industry type credit inquires) only lasts for 60 days, then the score self-repairs. Think of it as a conveyor belt spanning 60 days. On the 61st day, any 3-point detrimental inquiries fall over the edge.

But remember this:

Fico scores above 740 represent a very little risk to mortgage lenders. Scores over 780 are basically all lumped into one bucket of Absurdly low risk. So besides a credit ego-bruising, it is virtually impossible for a score of that level to have any vulnerability for a couple of inquiries prior to buying a home … even if a mortgage company isn’t coded correctly and the inquiry hits your score.

Final departing words of wisdom here:

Do NOT make any unusual purchases on credit prior to financing. While inquires are capped at 3 points, credit utilization and payment history effects have NO CAPS. A credit swing of 200 points in a matter of hours could be the result of certain credit activities.