There are a lot of factors that go into determining your credit score. While you’re likely aware that being tardy in repayments or declaring bankruptcy are the kinds of things that can damage your credit score, are you aware of the impact that a credit inquiry can have on your score?
Below we’ll take a deeper look at what a credit inquiry is, what it means for your credit score, and how it can impact your financial future.
What Is a Credit Inquiry?
A credit inquiry occurs when someone requests your credit score from one or more of the three major credit reporting bureaus: Experian, TransUnion, and Equifax. The reasons one might pull your credit score are many.
You might wish to pull your own score to see where you stand financially before applying for a loan or to check for evidence of fraud. A credit card issuer might request your credit score, either for pre-qualification or for approval for a new credit card. A lender will request your credit score before approving you for a mortgage, auto loan, or business loan.
It’s important to note that all types of credit card inquiries are not created equal, and the different types of inquiries will have different effects on your overall credit score.
Soft vs. Hard Inquiries
Soft credit inquiries are the less serious of the two types of inquiries. Soft inquiries are those requests for credit scores that are not requested by a lender who’s considering extending credit to you. (Although a lender or creditor could do a soft credit inquiry to check to see if you prequalify for a certain financial product.)
Because these inquiries are more for informational purposes, they do not have any bearing on your credit score. Generally speaking, you pulling your own credit score, a background check by potential employers, and pre-approval for a loan product or credit card are the types of inquiries that will fall into this category.
A hard inquiry occurs when the institution requesting the credit score is considering extending you credit in the future. To do this, they must pull your full credit report. Even if the inquiry ultimately leads the lender to decide not to extend you credit, the inquiry will still appear on your credit score in the future. Applying for any type of loan (small business, auto, mortgage) will generally result in a hard inquiry.
How Do Inquiries Affect Credit Score?
When a hard inquiry is logged, it does come into play on your credit score. One of the five major factors that goes into determining your credit score is “new credit,” which includes hard credit inquiries.
Having a hard inquiry every once in a while is not detrimental and is part of any adult’s financial life–occasionally you’ll need to apply for a new credit card or a loan. However, your credit score can be affected if you’re logging numerous hard inquiries in a short span of time.
If the credit bureaus begin to notice an abnormal number of hard inquiries, the assumption is that you’re desperately searching for cash and may be more likely to default on repayments. And the research bears this out: FICO has discovered that the greater number of new credit accounts opened in a short period of time, the greater the chance of default.
What If I’m Shopping Around For Loans?
If you’re looking for a new loan, you might be considering working with a number of different lenders, searching around for the best rates and terms. However, upon reading about hard inquiries, you might be worried that this savvy shopping move might actually be detrimental to your score.
Fortunately, FICO understands that this is common practice, and will therefore count all hard credit inquiries happening in a short period of time (usually between 15 and 45 days) as “rate shopping” and only log it as one instance of a hard inquiry.
Should I Worry About My Credit Inquiries?
Generally speaking, even if you do have a handful of hard inquiries in a short span of time, the effect they have on your overall score will be minimal. Inquiries will have a greater impact on your score the shorter your overall credit history is; the fewer items and events there are playing a role in determining your overall score, the greater the weight each action will have on your overall score.
And the impact the inquiries have on your credit score will not last forever. As Experian notes, a hard inquiry will remain on your record for two years at the most and will only be factored into their FICO algorithm for 12 months.
While credit inquiries are not something you should be losing sleep over, it is worthwhile to understand what they are and how they affect your overall credit score. Being mindful about how you apply for financing will allow you to avoid unnecessary damage to your credit score from excessive hard inquiries.