Credit scores can be frustrating if you don’t understand how they work. Did you know that not using your credit cards could backfire against you? And did you know that when some retailers and financial institutions access your credit report, the credit inquiries that occur could hurt your score … while other inquiries won’t? Not knowing these facts could seriously damage your creditworthiness in the eyes of potential lenders, so it’s important to stay on top of your credit education.
But let’s go back to the topic of credit inquiries. What exactly are they? Why are there different types?
A hard inquiry is an inquiry that occurs when a prospective lender checks your credit report to make a lending decision. Hard inquiries can slightly lower your credit score and will typically stay on your report for two years.
A soft inquiry is an inquiry that occurs when a person or company checks your credit report as a background check, like when you check your credit score or a mortgage lender pre-approves you for a loan. Soft inquiries can occur without your permission, but don’t worry – they won’t affect your credit in any way.
Hard inquiries commonly take place when consumers apply for a credit card, auto loan, mortgage or other loan. On the other hand, soft inquiries typically occur when employers access your report to look for signs of risk or you check your own credit report or score from sites like Credit Karma, Credit Sesame or MyFICO. Lenders may also use soft inquiries to preapprove you for a credit card or loan. Since they’re not making a lending decision or guaranteeing approval – they're only saying you’re likely be approved for that credit card or loan – these inquiries are typically considered “promotional” and won’t affect your score.
Unfortunately, there are some gray areas where either a hard or soft inquiry could occur, including when a bank needs to verify your identity or you apply to rent an apartment or car. If you’re worried about the growing number of hard inquiries on your report, ask the financial institution or company what kind of inquiry it will make before deciding whether you’d like to proceed or not. This way, you can avoid potentially unpleasant credit surprises.
While soft inquiries won’t lower your score, hard inquiries could slightly lower your score. The good news: Hard inquiries typically don't affect your credit score by much – factors such as your payment history and credit utilization rate are usually weighted more heavily. However, the impact of an inquiry can vary according to your credit history. If you have few accounts, a short credit history or a ton of inquiries, an additional hard inquiry could have a greater impact on your score.
Keep in mind, when creditors see a lot of hard inquiries on a report, they become more wary about extending credit because numerous hard inquiries looks like a consumer is desperate for credit or was previously unable to get the credit he or she needed from other creditors. In other words, a lot of inquiries may make you appear like a higher-risk borrower, so it’s best to minimize them.
If you want to apply for a new credit card or loan, there’s no avoiding the subsequent hard inquiry.
However, there is good news for those looking to shop around for the best deal on a mortgage or auto loan – some credit scoring models will combine multiple inquiries within a certain time period into just one. If you’re going to rate shop, make sure you stay consistent and work fast. Credit bureaus usually pick up on the fact that you’re comparison shopping by noticing the types of credit lines you’re applying for and the size of your requested loan, and they will typically give you a 30 day window to finishing shopping.
In general, it’s best to check your credit score and only apply for credit cards and loans for which you’re most likely to qualify. This way, while you can’t avoid credit inquiries, you can minimize the number of them. However, don’t stress out about avoiding all hard inquiries – as mentioned before, while they do have the potential to damage your credit health, they generally play a minor role in your score.
Take a look at our checklist to see the basic documents you’ll need to apply.