Watch out for the 5/24 Rule. Limit hard enquiry on your bureau file to avoid this trap.
At Reclaim! Your Good Credit we recommend a variety of strategies and tactics to improve your credit score. Some require you to pull back on credit, but others require you to apply for new credit. In this article we’ll explain the difference between a hard enquiry and a soft enquiry. And we’ll explain the credit bureau’s 5/24 Rule.
What is the 5/24 Rule?
When it comes to your credit score there’s a sweet spot where you have just the right amount, and the right mix of credit accounts to make the credit score algorithm happy. One of the things credit bureaus look at is the number of applications you submit for new credit accounts. They will ding your score when they see 5 or more new credit applications within the prior 24 months. That’s why they call it the 5/24 Rule. Most lenders will decline those applications, or assign a higher interest rate.
The good news is that the bureaus only count what’s referred to as a hard enquiry.
Hard enquiry vs. soft enquiry
There are two types of credit enquiries, a soft enquiry and a hard enquiry.
A soft enquiry happens when a lender pulls a credit report for internal use, like deciding to increase the credit limit on an existing account. Soft enquiries do not get reported to the credit bureau, and do not affect your score.
A hard enquiry happens when a lender pulls a credit report to decision a new application like a car loan, a credit card, or an apartment rental application. Hard enquiries get reported to the credit bureau, and 5 or more in 24 months can start to hurt.
How to remove a hard enquiry from your credit bureau file
These hard enquiries make up 10% of your score, and too many applications could cause it to drop by 30+ points. One of the ironies of the credit formula is that too little credit and too many credit enquiries are both bad for your score.
Don’t worry too much about hard enquiries that are already posted to the file. The credit bureaus automatically remove them after 2 years. You don’t need to contact them.
Conclusion
How many hard enquiries are bad?
Credit bureaus use the 5/24 Rule to decide which applications to approve and which ones to decline. This rule tells them not to approve a loan when the applicant has sent more than 5 credit applications to other banks within the past 24 months.
There’s good news for consumers. Many lenders help you avoid hard enquiries on your credit bureau file by running a soft enquiry when they review a new application. They wait to run the hard enquiry until after you accept their loan offer.
The best way to avoid a 5/24 penalty is to check your credit report, and wait for old enquiries to drop off your file before you submit any new applications. The credit bureaus will automatically delete hard enquiries from your file after 24 months, without any action on your part.