Credit Analysis: Credit Inquiries in P2P Lending

One of the figures given in the Credit information section of the loan listing for both lending platforms is Credit Inquiries.  Simply put, a credit inquiry is when one of the 3 big credit bureaus (Equifax, Experian or TransUnion) issues a credit report to some outside party that requests it, usually with our permission. For instance, when going for a mortgage or a bank loan then that mortgage company or bank will pull your credit report from one or all 3 of these bureaus.

A common school of thought among p2p lending bloggers is to set inquiries on your loan filter to zero because an inquiry implies a request for and denial of Credit.  As someone who does Credit Analysis for a living, this is way over-simplistic.  There are some cases where that is true but it is by no means true all the time.

For instance, did you know that if your credit card balances start to run up a little higher than your CC company prefers, they can run your credit to see if you are late elsewhere and use that information to determine if they want to jack your interest rate? Yep, you bet they can. In fact, the single biggest reason why borrowers use the P2P lending platforms is to consolidate their CC debts after their rate has been increased in just such a circumstance. Those are alot of good loans you could be missing out on.

 

Did you know that your bank can arbitrarily run your credit every so often just because you have a checking account there? They can.

Did you know if you have a business that vendors or bankers can pull your credit? Again, they can.

So it may be to the exclusion of some good quality loans if you only go with zero inquiries.  Now, that being said, more inquiries is definitely worse as each one does drop your credit score so your FICO goes down.  Now there is a special exception for mortgage companies who have a 30 day window when we are trying to qualify for a mortgage to run our credit numerous times without it dinging our FICO score as we shop around for a mortgage. Otherwise, more inquiries always leads to a lesser FICO score and potentially a riskier loan.  In my scorecard, zero inquiries gets the highest score but only after 2 or 3 inquiries does it start to penalize the loan itself from a risk/reqard point of view.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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