How A Credit Inquiry Affects Your Credit Score

One of the most common questions that readers want to know is how a credit inquiry affects your credit score.

A juicy bonus points offer might tempt you to apply for a new credit card, but what should you do with your old one? Then there are travel hackers who open and close multiple credit card accounts within a short period of time in order to maximize their rewards points and minimize fees. Will that have a negative effect on your credit rating?

Related: Getting approved for a credit card: Some are easier than others

To answer these burning questions, I reached out to Paul Le Fevre, Director of Operations at Equifax Canada, one of the major credit reporting agencies in the country.

1. What happens to my credit score when I apply for a new account?

Equifax response: Scoring products include inquiries as a component of the score. Approximately 7-10% of a score is based on the entire inquiry section, typically looking at ALL inquiries present within either a 1-3 year period, depending on the scoring product and product version.

The score also considers the inquiry type (mortgage/car loan, retail card inquiry etc). Mortgage and auto loan inquiries are each considered collectively to count as a single inquiry over a specific period of time so a consumer is not heavily impacted by shopping around for the best mortgage deal or auto loan.

2. What about when you apply for multiple credit cards within a short time frame?

Equifax response: The biggest misconception in the marketplace is that a single inquiry has a significant impact on a score: that is simply not true. In fact, 90-93% of a score is derived from how a consumer has managed credit over time and is currently managing their existing credit product portfolio.

If a consumer applies for multiple products in a short period of time, the impact may be slightly higher. However, I stress that payment patterns (when a consumer pays their bills) and outstanding balances (% utilization of the credit limit) weigh much more heavily on the score than inquiries.

3. Is it better for your credit score to keep your old credit card account open and inactive, or to cancel it altogether when you open a new account?

Equifax response: The best advice is to get the credit that you need and use it wisely.

Depending on the scoring product, an inactive account will not factor into the score after certain periods of inactivity, but may still impact debt service equations. Each file is different, but the consumer should be accessing and using credit products based on actual need. A long-standing credit product in use by the consumer (and in good standing) over a significant period of time will have a positive impact on a score.

4. What should “points hackers” (consumers who open and close multiple credit cards in order to take advantage of bonus points and rewards) be aware of when it comes to their credit rating and credit score?

Equifax response: Consumers who open/close multiple products on a regular basis will see a higher impact at the inquiry component of a score (due to regular and ongoing new inquiry traffic) and may also be impacting debt service equations overall.

Scores look at longevity of product use: the longer the product is in use, the more positive the score impact. Lenders look at all existing open products as part of their risk assessment, which could actually impact a consumer’s ability to obtain the credit that they truly need as opposed to obtaining credit for the sole purpose of obtaining rewards/points.

Final thoughts

One of my Twitter followers liked a recent article on cash back credit card rankings and said he’d love to switch to the Scotia Momentum Visa Infinite but he didn’t think it was a good idea because he’d be applying for a mortgage in a few months. He was worried about the impact that opening a new credit card account would have on his credit score.

Countless threads on the Personal Finance Canada subreddit obsess over credit scores, credit utilization, and the impact of having multiple credit card accounts and access to higher spending limits.

But now you’ve heard it right from Equifax – applying for credit cards, even opening multiple accounts within a short period of time, has minimal impact on your credit score if you manage your credit responsibly.

Aeroplan “Rewards” More Expensive Than Cash Fare

Aeroplan is the most popular loyalty program in Canada for a variety of reasons, including the fact that it’s tied to Air Canada – the largest airline in the country.  Many Elite and Super Elite Aeroplan collectors vouch for the program, swearing that it offers the best value on flights, particularly on long-haul business class trips.

But for the rest of us, Aeroplan is a bit of a mixed bag.  Easy to earn and collect points, yet difficult to redeem them due to seat restrictions and ever-changing mileage requirements for flight rewards.  Not only that, a bigger gripe is that fees and taxes are charged on top of any flight redemption, which doesn’t make it seem like a reward at all.

Some Aeroplan members suggest that those fees and taxes are often higher than booking directly through Air Canada or another airline.  So are Aeroplan rewards more expensive than buying a flight directly?

Related: One Aeroplan member’s somewhat satisfying update

Consider this email that I received from a reader named Anthony:

Currently WestJet is offering flights for $180 from Pearson International (YYZ) to LaGuardia (LGA), return.

Aeroplan reward tickets on the same itinerary are coming in at $185.41, plus miles of course.

I’ve attached a sample itinerary of both (direct flights, leaving almost at identical times).

Aeroplan rewards

WestJet Flight

In other words the fees and taxes on the Aeroplan flights, not even including the points, are more expensive than a cash fare. This would seem to point out in a very clear manner the ridiculousness of the Aeroplan fees and surcharges.

Final thoughts

When I last wrote about Aeroplan members and their frustration with the loyalty program, many readers weighed in with helpful suggestions to help maximize your flight rewards.  Tips such as crossing the border and using another Star Alliance member to avoid Air Canada’s fuel surcharges, or adding another leg to your long-haul trip to avoid the airports that charge higher taxes.

But at some point, Aeroplan collectors need to consider the time, money, and effort spent trying to redeem their rewards and realize that a better option is a more flexible travel rewards program that allows you to book any flight and on any airline without restriction.

Related: So you’re ready to dump Aeroplan: Now what?

Because no matter how valuable you think your rewards are, you’re not actually saving money if it costs you more to redeem your points than it would to book on another airline and pay cash.