Are You Obsessed With the Wrong Credit Details?

Have you ever spent hours picking out fonts and a color scheme for your website, but ignored the fact the copy was terrible? Or spent a morning organizing your desk while avoiding that important phone call you really needed to make? It's easy to get caught up in minutiae at work and lose sight of what's most important.

Of all the factors that can influence your credit scores, inquiries can sometimes be like those distractions, drawing your focus away from what's really important. But, not always. Sometimes those details can be crucial to getting a loan, especially for small business owners. 

The Big Picture On Inquiries

When anyone obtains your credit report or score, an “inquiry” is noted in your credit file. An inquiry in and of itself is not good or bad. It's just a record of the companies that have obtained an individual's credit information.  

Here are a few facts to understand about credit inquiries:

• When inquiries do impact credit scores, the impact of an individual inquiry is quite small, usually shaving just a few points off a credit score. The cumulative impact of multiple inquiries can be larger, however.


• Lenders often only check credit with one credit reporting agency, so an inquiry will typically only appear on a single report. (Some lenders, including mortgage lenders, may check multiple reports.)


• Inquiries don't indicate whether or not credit has been granted; again, they are only the record of a credit check.


• Most scoring models ignore inquiries that are older than one year.


• Inquiries are removed from credit reports after two years.

Not all inquiries will be included in credit score calculations. Many types of inquiries are considered “soft inquiries” and are not shared with creditors or used to calculate credit scores. These include those generated for promotional purposes (pre-approved card offers) or an account review, consumer-initiated (when you check or monitor your own credit), or employment or insurance-related credit checks.   

The bottom line is that inquiries are generally not a major factor in calculating a consumer's credit scores; payment history, debt, and credit experience carry much more weight.  

But . . . Small Businesses Are Different

Inquiries may have a different effect when entrepreneurs apply for financing, however. “Some lenders will more closely scrutinize the number of inquiries on the business owner's personal credit reports to see how closely they match with the number of outstanding accounts,” warns Caton Hanson, co-founder and chief legal officer at Nav (where I work). Why go into such detail?

Because unlike consumer credit accounts, which almost always appear on consumer credit reports, business accounts may not be reported on the owner's personal credit reports or the commercial credit reports of the business. The lender evaluating the application may be concerned that the small business owner has more access to credit (or outstanding debt) than can be ascertained by reviewing credit reports.

What Can Entrepreneurs Do?

It can be a mistake to think you shouldn't apply for financing you need just because you are afraid of creating an inquiry on your credit reports. At the same time, you don't want to haphazardly apply for credit in a way that will generate multiple inquiries that could, when totaled, hurt your scores. And you don't want to raise red flags with commercial lenders who will see a lot of very recent inquiries and may wonder if you are desperate for financing.

The key? Apply carefully, understanding which types of financing are right for your business, and which you're most likely to qualify for based on your personal and business credit profiles, the financial health of your business, and the lender's requirements. For example, most banks don't give business loans to startups, so that may be a waste of time. Or if a lender requests your Social Security number and your personal credit scores are terrible, that's not likely to be a good fit. (This guide to business financing requirements is a place to start.)

And if you are looking at ways to build or boost your credit, remember the things that will move the needle most are payment history and debt. Pay on time, and keep your debt levels low, and you'll make significant progress toward good credit.

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