Credit scores, or FICO scores, are three-digit numbers between 300 and 850. These scores show lenders a borrower's borrowing behavior and credit-management skills. FICO scores of more than 700 are considered "very good," and scores of less than 600 "indicate high risk," according to the Consumer Federation of America. Many factors, such as amount of debt, number of accounts, judgments, credit line increases (and decreases), and credit inquiries affect the credit score.
There are two main types of credit inquiries: hard credit inquiries and soft credit inquiries. Soft credit inquiries are triggered by a consumer checking her own credit report. The federal government requires that all U.S. citizens have free access to their credit reports through AnnualCreditReport.com. Accessing a credit report at this site will trigger a soft report. A hard inquiry is generated by any lender who checks a borrower's report for the purposes of rendering a credit decision.
Soft credit scores do not affect a credit report at all. Customers can pull these monthly, in needed. Credit monitoring is essential for financial health, and the passage of the Fair Credit Reporting Act was designed partly to help customers more easily manage credit reports.
However, hard inquiries do affect credit scores. One or two hard inquiries are not a problem. But excessive inquiries (more than six over a six-month period) will begin to lower a FICO score.
Credit Line Increases
Credit-line increases are not technically loan applications. Borrowers usually need not fill out paperwork or submit income documents to request a credit-line increases. However, in most cases, lenders must pull a new hard credit report to render a decision on requests for credit-line increases. Lenders are required to disclose this. Therefore, a request for a credit-line increase should be treated as a loan application. If borrowers have many credit inquiries, they should think twice before requesting an increase.
There are three major credit bureaus--TransUnion, Equifax and Experian. Although there are subtle differences between these three agencies, they all generally follow the same credit scoring method.
Credit reports, more than anything, show trends. These trends can lead to predictions. One of these trends is deteriorating credit. Lenders will deem a borrower's credit "deteriorating" if he has recent past-due payments, recent collections and many credit inquiries. Excessive inquiries tell lenders that a borrower is desperately trying to obtain credit.
However, the benefit of requesting a credit-line increase can outweigh the potential negative consequences of the credit inquiry. For example, say a consumer has a balance of $1,800 on a credit card with a $2,000 limit. This is a high balance percentage--another factor than could decrease a FICO score. A credit inquiry could lower the FICO score, but if the increase is granted, it will bring the total utilization on the credit card much lower. This will help the FICO score.