Chris Bridges, Founder and CEO, VITAL Card Inc.
Are you wondering whether there’s any difference between checking your credit score on your own and the credit institution doing it for you? Well, while you and the lender will see the same number, each inquiry will affect your credit score differently. Read more to learn about the difference between a hard and soft inquiry.
Why You Should Not Overlook Your Credit Inquiries
Most people overlook credit inquiries during conversations about credit scores, even though they form a substantial component of the credit score: credit inquiries make up 10% of your FICO Score.
Your credit score depends on fine margins, and even a small credit score drop caused by credit inquiries can be enough to lower your credit score resulting in higher annual interest rates. Of course, these rates compound fast and can lead to you paying back significantly higher amounts of money.
Two types of credit inquiries exist — hard inquiries and soft inquiries — and they impact your credit score differently. This article will help you understand how credit inquiries work, the difference between hard and soft inquiries, and the impact of each on your credit score.
How Do Credit Inquiries Work?
Lenders usually ask for your credit report when deciding whether or not to extend credit to you, how much to extend, and at what interest rate. The report is essentially a summary statement of your debts and the payment history of those debts. Major credit bureaus like Equifax, Experian, and TransUnion maintain a record of your inquiries in your credit report.
As part of the evaluation process, the lender obtains your credit score — a number derived from analyzing your credit report. Higher credit scores indicate you are unlikely not to repay your debt. Creditors need your permission to run these checks, and when they do, a hard inquiry pops up on your credit report.
Your existing creditors are allowed to check your credit report periodically, and your employer can check your credit history with your permission. Of course, you can also check your own credit report and scores. This check has no impact on your credit rating, and since it is not related to any application for credit, it only generates a soft inquiry on your credit report.
What Is a Hard Inquiry?
A hard inquiry — otherwise known as a “hard credit check” or “hard pull” — is when a financial creditor checks your credit to make a lending decision. A hard credit pull usually occurs when applying for a loan, mortgage, or credit card and requires your permission.
Such an inquiry lowers your credit score by a couple of points and thus probably won’t significantly impact whether you get approved for a new loan or card. The impact on your credit score will also decrease over time as the inquiry gets removed from your credit report after two years.
When Do Hard Inquiries Take Place?
When you apply for pre-approval from mortgage lenders, a hard inquiry appears on your credit report as lenders are looking for more information to determine your creditworthiness for the mortgage loan.
While the repercussions don’t seem that bad, you might want to reconsider multiple new credit card applications simultaneously or in a short period. Numerous hard inquiries in a short time frame may prompt potential lenders and credit card companies to mark you as a high-risk applicant as it could suggest you are low on cash.
What Is a Soft Inquiry?
Soft inquiries, also known as “soft credit checks” or “soft pulls,” occur when a company or person checks your credit during a routine background check. Your potential employer could also run a soft credit inquiry to see if you have a good credit history before hiring you. The critical difference is that someone can make a soft inquiry without your consent.
Soft inquiries don’t impact your credit score and may not appear on your credit report. Since these inquiries are unconnected to any specific applications, they are only visible when you want to view your credit report.
What Are Examples of Hard Inquiries and Soft Inquiries?
The key differentiating factor between hard and soft inquiries is whether you have to give the lender permission to check your credit report. If you have to give your consent, it is a hard inquiry. If not, it is a soft inquiry.
Let’s look at some common instances of when hard or soft inquiries would appear on your credit report.
Common Hard Inquiries
- Mortgage Application
- Automobile Loan Application
- Credit Card Application
- Student Loan Application
- Personal Loan Application
- Apartment Rental
Common Soft Inquiries
- If you check your credit score on your own
- The credit card offers that you ‘prequalify’ for
- Insurance quotes that you ‘prequalify’ for
- Background checks
You should keep in mind that we did not mention every type of credit check in the list above. For instance, your cellphone provider or internet provider may want to check your credit periodically.
If you are uncertain about the classification of a specific inquiry, you can always ask the company or financial institution to clarify this.
How Do Credit Inquiries Impact Your Credit Score?
When a lender requests your credit report, your credit score can fall. Data suggests that consumers who apply for fresh credit are riskier than those who don’t.
FICO states that if you have more than five credit inquiries in the last year, you are six times likelier to be 90+ days past due on your credit obligations than consumers without inquiries.
Six or more credit inquiries make you eight times more likely to file for bankruptcy than other consumers. Creditors, lenders, and other companies use your credit score to determine the risk of conducting business with you.
Anything on your credit report that shows you are likelier than the average to default on a credit obligation could cause your credit score to decline. This is especially true of hard credit inquiries and includes other actions that could increase your credit risk, like high usage or late payments.
Depending on your credit profile, hard credit inquiries can typically lower your credit score by zero to five points. However, the exact reduction depends on the length of time since your last inquiry and your credit history. Therefore, it is advisable to be cautious and refrain from applying for different lines of credit unless necessary.
Why Rate Shopping Time Frames Matter
However, the FICO score recognizes when you are shopping for the best rates. For example, if you are applying for mortgages with multiple lenders in a short period, the FICO score only records one hard inquiry. Thus, if you want to benefit from this rule, where a single inquiry is recorded, you should ensure that your rate shopping occurs in a concise time frame.
A hard credit inquiry is far from the main factor determining your credit score: credit inquiries account for 10% of your credit score, whereas your payment history determines 35% of your FICO score. The VantageScore credit scoring model gives hard credit inquiries just 5% of weightage.
It is important to note that each credit inquiry doesn’t contribute to a specific point deduction to your credit score. While knowing that every new hard inquiry lowers your score by five points is a valid generalization, it isn’t entirely accurate.
Instead, the credit scoring model considers the aggregate number of inquiries on your report along with their age. The rest of your credit history also plays a significant role; e.g., for people with a limited credit history, every new hard inquiry will probably have a more substantial impact than those with more extensive credit histories.
How Long Do Inquiries Stay on Your Credit Report?
While credit reporting is usually a voluntary process, inquiries are very different. Credit card issuers aren’t legally required to share customer information with credit bureaus. In addition, credit bureaus don’t have to include credit card accounts on credit reports. This is usually reported and contained within your credit report because it can help companies improve their bottom line.
Inquiries, on the other hand, are regulated by law. Credit bureaus must disclose every time they give anyone access to your credit history. The Fair Credit Reporting Act (FCRA) dictates that inquiries usually stay on your credit report for 12 months. Employment inquiries, or inquiries conducted as background checks, usually remain for a more extended period, up to 24 months.
Credit reporting agencies usually keep inquiries on your credit report for two years. However, FICO only considers hard inquiries that occurred in the last year to calculate your credit score. VantageScore is more lenient with inquiries. Hard inquiries that lower your credit score usually rebound in three to four months if no new negative information comes up.
How To Manage Hard Inquiries?
Since hard inquiries impact your credit score, you should probably avoid applying for different types of loans or credit cards in a short duration, which can unnecessarily lower your credit score.
Although the rate shopping exception means that multiple inquiries made for the same purpose within a short time frame count as one, several different inquiries for different reasons might prompt lenders to believe that you are undergoing financial distress.
We recommend avoiding loan or credit applications for six to 12 months before applying for a new mortgage or car loan, so your application reflects your optimal credit score.
How To Remove Hard Inquiries?
In the scenario that a hard inquiry is connected to fraudulent activity, like someone impersonating you and applying for credit, you can take the following steps:
- First, report it to law enforcement agencies.
- Second, protect your credit reports with a security freeze or fraud alert.
- Third, dispute the inquiry to get it removed from your credit report.
You should regularly check your credit report from all three credit bureaus at least once per year and be on the lookout for hard inquiries you don’t recognize. Unexplained hard inquiries, though rare, could lower your credit score and can also be an indication of criminal activity.
If you encounter an unexpected hard inquiry, you can reach out to the creditor who pulled your credit report. These suspicious inquiries aren’t always connected with illegal activities; unfamiliar creditors may just be a lending partner of a retailer with whom you applied for credit.
The Bottom Line
Your credit score is a significant indicator of your financial health. So make sure to build your credit score before applying for credit. Stronger credit increases the likelihood of you getting approved for competitive loans and credit rates.
Finally, refrain from applying for multiple credit cards in a short period. A solitary hard inquiry will lower your credit score by a few points, but multiple inquiries could cause more damage to your personal finances unless you are rate-shopping. You can also build a high credit score with VITAL Card’s features such as financial tracking and spending summary reports. Learn more about responsible credit growth at VITAL today.
“What Is New Credit?” myFICO.com
“Fair Credit reporting Act,” Federal Trade Commission