"We Do Not Pull Credit" Is Not A Selling Point, It's A Sales Tactic

This ad plays up a long-standing American fear -- that credit inquiries will drop a person's credit score below a hypothetical mortgage "approval line".  It's Fear Selling at its worst, preying on customers that don't know any better to the benefit of the salesman.

So, because the best way to combat fear is with education, let's look at how credit inquiries really work and why they're perfectly safe for mortgage shoppers.

We can start with some credit scoring basics.

A "credit inquiry" is a formal request to review a person's credit report.

There are many types of inquiries, but only four types can impact a person's credit score:

1. Applying for a credit card
2. Applying for an auto loan
3. Applying for a mortgage loan
4. Applying for store credit, or some other type of credit

The reason that these four types are singled out is because each of them is an applicant-initiated request to get access to more debt. 

But even these four types are not ranked equally.

For example, because credit cards are below auto loans on the Credit Totem Pole, credit card applications can be more damaging to credit scores than trying to buy a car.

This makes sense when you consider that credit card debts tend to revolve higher over time versus auto loans that eventually pay down to $0.

But the credit bureaus don't want to overly penalize for what may happen in the future, or what debt you haven't incurred yet.  All three bureaus put a much heavier emphasis on how you're managing the credit you already have.

Versus the 65 percent of a credit score related Payment History and Current Utilization of Credit, just 10 percent is tied to credit inquiries and you'd have to have a ton of nefarious-looking inquiries in a very short period of time to use that whole 10 percent.

More likely is that mortgage lender credit check is limited to 5 points off a credit score, or 0.58% against the 850-point scale. 

Unfortunately, we'll never know for sure because the very act of examining the credit score causes it to move. 

In Chemistry, this is called the Heisenberg Principle.  On MTV, it's called Real World Syndrome.  Put a camera on something, and it changes.

But, unlike credit cards, though, multiple credit checks by mortgage lenders will not damage your credit score multiple times.  It's a formal policy that protect homeowners and give them the right to "rate shop" within a 14-day time frame.

Every credit bureau has something similar on their Web site, but here's the clip from the FICO people, moved into bullet points and interpreted:

• Getting the best rate may mean "shopping around"
• Mortgage lenders need to see your credit score to give accurate quotes
• To help you, we won't count inquiries against your credit score for 14 days

In other words, credit bureaus mortgage inquiries while you rate shop with the caveat that you complete your shopping within 14 days.  If the shopping period extends beyond that, scores may drop a little bit, but -- as we've already shown -- the damage should be limited to just a few points.

Letting a mortgage lender pull your credit has much more upside than downside.

• It can identify areas for credit score improvement, leading to better rates
• It makes for more accurate rate quotes because of loan-level pricing adjustments
• It can help your loan officer identify debtor patterns and make recommendations

Credit education is improving among Americans, but ads like the one at top show that there's still a way to go.

Mortgage lenders need to know an applicant's credit score; it's part of the diagnosis. 

And when a mortgage company advertises "We Do Not Pull Credit", it's like a doctor's office advertising "We Do Not Check Your Temperature".

You wouldn't trust a doctor that builds business that way and you shouldn't trust a mortgage company that does, either.

Credit score are the keystones of mortgage approvals and the credit bureaus know it.  Now, you know it, too.