Oct. 3, 2018
There is such a love-hate relationship with credit scores.
If you've got a high score, you feel pretty good about yourself. It's seen as a sign that you're an excellent money manager.
But if you're credit-challenged, you likely hate the score, which lenders use to help measure the riskiness of borrowers.
There are a number of different credit-scoring models. The best known and most widely used is FICO, which rates consumers on a scale of 300 to 850. The higher your score, the better borrower you're considered to be.
Earlier this year, I got to the scoring version of Mount Everest: I achieved a perfect 850 on two different scoring models, both produced by FICO.
Only 1.5 percent of scorable U.S. consumers earned an 850 as of April this year, according to Ethan Dornhelm, vice president of scores and predictive analytics at FICO.
Then one move resulted in my losing my perfect score as measured by Discover's free scoring tool at creditscorecard.com.
I did something that I knew would make my score drop.
My engagement ring and wedding band needed some repair. In particular, the prongs holding my marquise diamond stone were loose. Because the set was looking a bit worn after nearly 27 years of marriage, I considered upgrading both rings. I visited a jewelry store in August to price some new rings. My frugal side reacted badly to what I found, and I dropped that idea. No, I would just get my rings repaired.
The store clerk worked up an estimate for the repair. I shuddered at this cost as well. Noticing my hesitation, she made a pitch that many consumers have come to know well.
"If you sign up for our store credit card, we can offer you a discount on the repair," she said.
When you apply for credit, a lender will pull your credit report, and that action is called a "hard" inquiry. The credit models take into account whether you are actively seeking to borrow. New credit activity determines 10 percent of your score. Inquiries can stay on your credit report for two years, but it only impacts your FICO score for the last 12 months.
Depending on your credit history, one hard pull might take less than five points off your score, or it may not result in a drop at all. But the impact can be greater if you don't have a lot of accounts or you have a short credit history, FICO says.
The scoring model also allows consumers to rate-shop for a single loan. For its newest versions, FICO says all inquiries done within a 45-day window for auto, mortgage or student loans are treated as a single credit inquiry. The same is true if you're hunting for an apartment in which potential landlords will pull your credit score. (Your score is not affected when you pull your own credit file, which is called a "soft" inquiry.)
I didn't want to mess with my perfect score, especially since I knew it was unlikely I would ever use the jewelry-store card again. Yet, the deal the sales person was offering significantly reduced my repair bill. I applied for the card.
I wasn't immediately approved. I received a letter from the lender asking for additional information. However, the store clerk offered the discount regardless of whether I was approved. So I saw no need to complete the application.
Except for the one inquiry, my credit history was virtually unchanged. Within a month, my score dropped to 849.
Two months later, I was back at 850.
FICO reported that, as of April, the percentage of the population with one or more "hard" inquiries in the last year hit a four-year low of 42.2 percent.
"While not a strong driver of the FICO score, having a greater number of inquiries on file has been shown to be an indicator of increased repayment risk," according to a FICO blog.
Typically, lenders lump potential borrowers in tiers based on ranges within a scoring model. For example, when I was refinancing my mortgage, the best customer category was listed as having a FICO score of "750 or higher."
I hadn't taken a big risk applying for the store-branded card. Because my score is so high, I have some room to weather a minor decrease. But even a drop of one point might push others into a less favorable tier.
Here's the lesson if your score isn't in a near-perfect range: Consider the long-term savings you may be giving up before applying for new credit.