When it comes to managing your credit, understanding how credit inquiries affect your credit score is essential. Whether you’re applying for a credit card, a loan, or a mortgage, credit inquiries are a part of the process. However, not all credit inquiries are created equal, and knowing how they work can help you make more informed financial decisions. In this post, we’ll break down what credit inquiries are, the two types of inquiries, and how they can impact your credit score.
What Are Credit Inquiries?
A credit inquiry occurs when a lender, creditor, or company checks your credit report as part of a financial application. This could be for a new credit card, car loan, mortgage, or even a rental application. When someone checks your credit, it’s recorded on your credit report and may impact your credit score, depending on the type of inquiry.
There are two types of credit inquiries: hard inquiries and soft inquiries. Each type has a different effect on your credit score.
1. Hard Inquiries (Hard Pulls)
A hard inquiry (also known as a "hard pull") happens when a lender or creditor evaluates your credit report as part of making a decision about your credit application. Hard inquiries typically occur when you apply for:
A new credit card
A personal loan
A mortgage or auto loan
A line of credit
Hard inquiries have a temporary impact on your credit score. Each time a hard inquiry is made, your score may drop by a few points, typically between 5 to 10 points. While this drop is usually small, multiple hard inquiries within a short period can add up and cause a more significant dip in your score.
Why Do Hard Inquiries Affect Your Credit Score?
Hard inquiries can indicate to lenders that you’re actively seeking new credit, which could suggest higher financial risk. A series of hard pulls may indicate that you’re struggling to manage your finances or taking on more debt than you can handle.
However, it’s important to note that the impact of a hard inquiry is often short-lived. Most credit scoring models only consider inquiries from the past 12 months, so your score will gradually recover as time passes, assuming you manage your credit responsibly.
2. Soft Inquiries (Soft Pulls)
A soft inquiry (or "soft pull") occurs when your credit report is checked but isn’t tied to an application for new credit. Soft inquiries do not impact your credit score and typically occur in the following situations:
A lender or creditor checks your credit for a pre-approved offer or a background check
You check your own credit report
An existing creditor reviews your account for account management purposes (e.g., credit limit increase)
Since soft inquiries don’t affect your credit score, you can safely check your own credit report or receive pre-approved offers without worrying about damaging your score.
How Long Do Credit Inquiries Stay on Your Report?
Hard inquiries typically stay on your credit report for two years. However, their impact on your credit score generally decreases after the first few months. After a year, hard inquiries have less influence on your score, and their effect fades even further after the second year.
How Can Credit Inquiries Affect Your Credit Score?
While a single hard inquiry may cause only a small dip in your score, multiple inquiries within a short period can have a more noticeable effect. However, there is an important exception: When you’re shopping around for a loan (such as a mortgage, auto loan, or student loan), credit scoring models often treat multiple inquiries within a short time frame as a single inquiry. This allows you to compare loan offers without worrying about multiple hits to your credit score.
For example, if you apply for several mortgages over the course of a few weeks, FICO will count those as one inquiry, as long as they’re within a 45-day period. This practice is known as “rate shopping” and is designed to help consumers find the best deals without damaging their credit.
How to Minimize the Impact of Credit Inquiries
Limit New Credit Applications: Try to avoid applying for new credit unless absolutely necessary. Each application results in a hard inquiry, and too many can hurt your credit score.
Rate Shop Wisely: If you're planning to apply for a mortgage, auto loan, or student loan, do your rate shopping within a short period—typically 14-45 days. This way, multiple inquiries will be grouped together and won’t have a negative impact on your score.
Monitor Your Credit: Regularly check your credit report to ensure there are no unauthorized inquiries or errors. If you spot any, dispute them immediately to avoid unnecessary damage to your score.
Only Apply for Credit You Need: Before submitting a credit application, ask yourself if you really need that new credit card, loan, or service. Being strategic with credit applications can help you maintain a healthy credit score.
Conclusion
Credit inquiries are a natural part of the financial process, but it’s important to understand how they affect your credit score. Hard inquiries may cause a small, temporary dip in your score, but their impact is usually minor if you manage your credit responsibly. By limiting unnecessary credit applications, shopping around for loans within a short time frame, and monitoring your credit report, you can minimize the negative impact of credit inquiries on your credit score.
Understanding credit inquiries is just one piece of the puzzle when it comes to managing your credit. For a more complete approach to improving your credit, consider seeking advice from a credit consultant or taking steps to build a strong credit history through timely payments, smart borrowing, and responsible credit usage.
Comments