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What Is A Credit Inquiry And How Does It Affect Your Credit Score?

ByDhruvi Bajariya December 20, 2024December 14, 2024

Table of Contents

A credit inquiry is when a lender looks at your credit report from Experian, Equifax, or TransUnion. It’s important for checking if you’re a good credit risk. Your FICO® Score, a key credit health measure, can be affected by these checks.

There are two kinds of credit inquiries: hard and soft. Hard inquiries happen when you apply for new credit. This can lower your score a bit, and the effect lasts up to a year. Soft inquiries, however, are for background checks or when you check your own report. They don’t change your score.

Key Takeaways

A credit inquiry is a request to view your credit report, made by lenders or financial institutions.
There are two types of credit inquiries: hard inquiries (which can impact your credit score) and soft inquiries (which do not affect your score).
Hard inquiries, such as those from credit card or loan applications, can temporarily lower your credit score by a few points.
Soft inquiries, like checking your own credit report or prequalification offers, do not impact your credit score.
Multiple hard inquiries in a short period may be viewed negatively by lenders, suggesting an overreliance on new credit.

Understanding Credit Inquiries: Types and Definitions

There are two main types of credit inquiries: hard and soft credit checks. Knowing the difference is key because they affect your credit score differently.

What is a Hard Credit Check?

A hard credit check happens when you apply for a new credit card or loan. It requires your permission and shows you’re looking for new credit. Hard credit checks can lower your credit score because they show you’re seeking more credit.

What is a Soft Credit Check?

A soft credit check is when your credit is reviewed for reasons not related to applying for new credit. This can be during background checks or when you check your own credit report. Soft inquiries don’t harm your credit score.

Key Differences Between Hard and Soft Inquiries

The main difference is how they affect your credit report and credit score. Hard inquiries can lower your score, while soft inquiries don’t. Hard inquiries are seen by lenders, but soft inquiries are only visible to you.

Understanding these differences is crucial for managing your credit. Keeping an eye on your credit report and knowing the type of inquiries you have can help keep your credit score healthy. This way, you can make better choices when applying for credit.

How a Credit Inquiry Impacts Your Credit Score

Credit inquiries can affect your credit score. FICO Scores, used by many lenders, see a small impact from inquiries. This impact is less than five points per inquiry. But, it can be bigger for those with little credit history or few accounts.

These inquiries make up about 10% of your FICO Score. But, payment history and debt are more important. Those with many inquiries are more likely to file for bankruptcy.

Not all inquiries are the same. Soft inquiries from checking your own report or pre-approved offers don’t hurt your score. But, hard inquiries from new credit applications can temporarily lower your score.

The good news is that hard inquiries’ impact is usually small. It can go back up in a few months if you pay bills on time and lower credit card balances. FICO also has rules to help, like ignoring some inquiries for 30 days or treating multiple inquiries as one for 45 days.

In short, credit inquiries can slightly lower your FICO Score. But, this effect is usually short-lived. Knowing the difference between hard and soft inquiries and managing your credit well can help.

Common Activities That Trigger Hard Credit Checks

Not all credit checks are the same. Some, called “soft” inquiries, don’t affect your score. But “hard” inquiries can lower it temporarily. Knowing what activities lead to hard checks is key to keeping your credit score healthy.

Credit Card Applications

Applying for a new credit card often leads to a hard credit check. Lenders check your credit history and financial details before approving you. This can lower your score by about 5 points.

Loan Applications

Applying for a mortgage, auto loan, student loan, or personal loan also triggers a hard check. These checks affect your score. This is why it’s important to shop around carefully if you’re applying for multiple loans at once.

Housing and Utility Services

Getting an apartment or setting up utility services like electricity or internet can also lead to a hard check. Landlords and service providers check your credit to make sure you pay on time.

Being aware of these common hard credit check triggers is important. It helps you manage your credit score better. By knowing when and why credit checks happen, you can keep your credit in good shape and reach your financial goals.

Rate Shopping and Multiple Inquiries

Understanding how rate shopping and multiple inquiries affect your credit score is key. FICO Scores, the most common credit scoring model, handle these situations in a way you might not expect.

For mortgages, auto loans, and student loans, FICO Scores ignore inquiries from the last 30 days. Inquiries older than 30 days are counted as one if they’re within a typical shopping period. This period is 14 days for older FICO Scores and 45 days for newer ones.

To protect your credit score, do your rate shopping in a focused 30-day window. This way, multiple inquiries for the same loan type are seen as one. This reduces the damage to your FICO Score.

Credit card applications are different. Each one results in a hard inquiry, which can hurt your score. To avoid this, apply for all credit cards in a 14-day span. This prevents multiple hard inquiries from lowering your score.

Remember, hard inquiries can stay on your report for up to two years. But FICO Scores only look at inquiries from the last 12 months. VantageScore, another scoring model, might consider inquiries from the last 24 months.

Credit Inquiry Type	FICO Score Impact	VantageScore Impact
Mortgage, Auto, Student Loan Rate Shopping (within 45 days)	Treated as a single inquiry	Treated as a single inquiry within a 14-day window
Credit Card Applications	Each application counted separately	Each application counted separately
Prequalification	No hard inquiry, no impact on credit score	No hard inquiry, no impact on credit score

By grasping the details of credit inquiries and rate shopping, you can make smart choices. This helps keep your credit score strong. The main thing is to do your rate shopping in a short time frame.

How Long Do Credit Inquiries Stay on Your Report

Knowing how long credit inquiries affect your report is key to a good credit score. Hard inquiries, from new credit applications, last up to two years on your report. But, they only really affect your score for the first 12 months.

Two-Year Timeline

Hard inquiries can be on your report for up to two years after they’re made. Even if you’re not approved for credit, the inquiry will still show up for two years.

Impact Duration

Though hard inquiries last two years, their score impact is mostly in the first year. Credit-scoring models like FICO only look at the last year’s inquiries when calculating your score.

It’s worth noting that multiple hard inquiries for big loans like cars or homes in a short time are counted as one. This helps your score less when you’re shopping for these loans.

Removal Process

You can’t get legitimate hard inquiries removed early. But, if you think an inquiry is fake, you can dispute it. Disputes usually take 30 to 45 days to fix, and if it’s fake, it gets removed.

To start a dispute, check your report, find the bad inquiry, and contact the credit bureau. Freezing your credit can also stop more unauthorized inquiries.

Keeping your credit healthy means staying alert to credit inquiries. Knowing their impact helps you decide when to apply for credit and how to avoid score harm.

Also Read: What Is Secured Credit And How Does It Work?

Conclusion

Managing credit inquiries is key to a good credit score. Hard inquiries happen when you apply for credit. But, you can reduce them by spacing out your applications.

Regularly checking your credit helps you see how inquiries affect your score. With smart credit habits, the impact of hard inquiries fades. This lets your credit score bounce back.

Knowing the difference between hard and soft inquiries helps you make better choices. Soft inquiries don’t hurt your score, letting you check your credit without risk. Hard inquiries, however, can lower your score by about five points.

By keeping an eye on your credit reports, you can spot and fix any odd inquiries. This careful approach, along with good credit habits, keeps your credit in good shape. It opens doors to financial opportunities.

FAQs

Q: What is a credit inquiry?

A: A credit inquiry occurs when a lender or creditor checks your credit report to evaluate your creditworthiness. There are two types of credit inquiries: hard inquiries and soft inquiries.

Q: How do hard inquiries affect your credit score?

A: Hard inquiries may negatively affect your credit score. Each hard inquiry can lower your score by a few points, depending on your overall credit profile.

Q: How long do hard inquiries stay on your credit report?

A: Hard inquiries stay on your credit report for two years. After this period, they will be removed automatically.

Q: Can multiple hard inquiries hurt my credit score?

A: Yes, many hard inquiries can negatively affect your credit score. However, if you are shopping for a loan or credit card within a short time frame, multiple inquiries may be treated as a single inquiry.

Q: What is the difference between hard inquiries and soft inquiries?

A: Hard inquiries are made when a lender reviews your credit report for lending purposes and can affect your score. Soft inquiries, on the other hand, do not affect your score and are typically used for background checks or personal credit checks.

Q: How can I check my credit report for hard inquiries?

A: You can check your credit report for hard inquiries by obtaining a free credit report from one of the three major credit bureaus. This report will detail all inquiries made on your credit file.

Q: Will a hard inquiry appear on my credit report?

A: Yes, a hard inquiry will appear on your credit report. It will list the date of the inquiry and the name of the creditor that requested it.

Q: How can I improve my credit score after a hard inquiry?

A: To improve your credit score after a hard inquiry, focus on making timely payments, reducing debt, and maintaining a low credit utilization ratio. Over time, the impact of the hard inquiry will diminish.

Q: Can I remove hard inquiries from my credit report?

A: Hard inquiries can only be removed from your credit report if they are inaccurate or unauthorized. If you identify an error, you can dispute it with the credit bureau to have it corrected.

Q: Are there any exceptions where hard inquiries won’t affect my score?

A: Yes, if you have multiple inquiries for the same type of credit—such as a mortgage or auto loan—within a specific time frame, they may be treated as a single hard inquiry, reducing the overall impact on your credit score.

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