Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes “Speaking of Credit,” a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
Dear Speaking of Credit,
I have been preapproved for a $40,000 mortgage. I have decided not to purchase a home at this time. Is it a bad idea to apply for a Costco credit card before I notify my bank that I will not be using the preapproval at this time? Or is it better to wait until I don’t have a preapproval on record. I have a 730 credit score. – Roseann
Credit score-wise, whether you do or don’t notify the bank of your intention to forgo the preapproved mortgage loan at this time, you should have little to worry about. That’s because, in a sense, any score damage would have already been done by inquiries at the time of the preapproval credit checks. Here, we’ll take a look at how the two most common types of preapprovals – mortgage and credit card – affect credit scores.
In the typical mortgage preapproval scenario, a consumer approaches a lender, looking to borrow, whether a home has already been selected or the shopping has just begun. When a loan is preapproved, the lender has established a maximum loan and monthly payment amount, relying on pay stubs, W-2s, tax returns, bank statements and other documentation supplied by the borrower.
Simply put, inquiries are the name of the game when looking at how preapprovals affect credit scores. Any similarities and differences in score impacts from preapprovals are the result of inquiries being treated differently according to the type of credit being considered.
Hard and soft inquiries
Among these differences are “hard inquiries” and “soft inquiries.” A hard inquiry is posted to a credit file any time a consumer initiates a credit pull via an application for credit. A soft inquiry is the result of a consumer accessing her own credit file, an insurance or employment-related pull, or a lender-initiated look at her credit report for “promotional” or “account review” purposes.
Most importantly, hard inquiries can affect a credit score, soft inquiries cannot.
Mortgage-related hard inquiries feature a couple of consumer-friendly features not available when inquiries come from credit card preapprovals:
- 30-day buffer period – mortgage inquiries less than 30 days old are not included in the score.
- 14/45 day inquiry deduplication – multiple mortgage inquiries occurring within a 14-day or 45-day period (depending on the score model used) count as a single inquiry.
When counted, the typical hard inquiry tends to lower a credit score by about five points, though only during the first of the two years it appears on a credit report. And since mortgage preapprovals typically require credit pulls at all three major credit bureaus – Equifax, Experian and TransUnion – this point loss can affect scores at all three.
Credit card preapprovals
Whereas most mortgage applications and preapprovals result from a borrower seeking out a lender for the loan, the typical credit card preapproval comes to a consumer as an unsolicited credit offer from a credit card company. Most often, the recipient is someone whose name and address were included on a list of qualified consumers provided by the credit bureau at a card lender’s request.
Whether a card offer is accepted or ignored, by the time it has been sent to a consumer, a soft promotional inquiry has been added to her credit report. When ignored, a card preapproval has no credit scoring impact. Only when a consumer accepts an offer can the score be affected. This occurs when, upon acceptance, the card company pulls an updated score to establish a credit limit and interest rate that are appropriate for the amount of credit risk indicated by the current score. The result is a hard inquiry posted to the credit report and, usually, the loss of a few points.
Since neither the 30-day buffer nor the 14/45-day inquiry de-duplication features apply to credit card inquiries, every card-related hard inquiry incurred during the past year can affect a consumer’s score. Despite this disadvantage, card preapprovals have one advantage over mortgage preapprovals, as the process calls for only one credit bureau to be used instead of all three. This leaves only one of the three bureau scores affected by a hard inquiry from a card preapproval.
It’s a good idea to be aware of these scoring consequences when applying for a mortgage or considering a credit card offer, especially when trying to raise a credit score or keep it from dropping. Fortunately, when compared to the long-lasting and potentially devastating point losses from late payments or high card balances, losing five points or so from a preapproval should cause little worry.
Meet CreditCards.com’s reader Q&A experts
Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com’s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.