You may have heard that a hard inquiry can hurt your credit score. But you may not be sure what that means — what is a hard inquiry anyway? Hard inquiries are created when you apply for credit. They can potentially drop your credit scores, which can result in higher interest rates when you borrow. On large loan, like those for a car or home, a drop of even a few points can mean a higher interest rate. And that may mean you’ll pay more over the life of the loan.
What Is an Inquiry?
An inquiry is created when your credit report is accessed by a business. Let’s say you apply for a car loan, and the lender requests your credit report and score from Experian. The fact that your credit information was used by a particular company will be noted on your Experian report with the date, name of the company that requested it and the type of inquiry.
Before we get into the specifics of how inquiries work, it’s important to put them in perspective. Unless you have been shopping heavily for credit (more on that in a moment), they shouldn’t have a huge impact on your credit scores. New credit, which includes inquiries as well as new credit accounts, makes up just 10% of your FICO score. As a result, a single inquiry is likely to drop your score by less than five points, but only if it’s a hard inquiry and with the limits described below.
While inquiries remain on your credit reports for two years, only those within the past year count, at least with the majority of score models used these days. Older ones are ignored.
What Is a Hard Inquiry?
Hard inquiries can affect your credit scores. They show you’ve applied somewhere to get credit, whether that’s a car loan, mortgage, student loan or credit card. Each of these credit checks counts as an inquiry and indicate a lender has reviewed your credit because you’ve applied to borrow from them.
What Is a Soft Inquiry?
Soft inquiries aren’t generated by shopping for credit and do not affect your scores. For example a lender sending you a pre-approved credit offer without you applying is a soft inquiry. Checking your own credit score is also a soft inquiry. Similarly, if you already have a credit card or loan with a lender, they may review your account from time to time. The resulting account review inquiry will not show up when lenders request your reports or scores.
As an aside, inquiries generated by an employer or an insurance company are ignored for the purposes of calculating your scores.
How Can I Keep My Credit Scores From Dropping?
There are several ways to minimize the likelihood that your scores will drop due to hard inquiries. Here are a couple of them:
Looking for a mortgage, car loan or student loan? It’s a good idea to limit your shopping to a two-week period. If you do, it’s likely those applications will only count as a single inquiry. That’s because most scoring models count all inquiries of one of those types as one, provided they take place within a 14- or 45-day period.
Monitor Your Credit
It’s wise to check your credit report and credit scores before you shop for credit. Then do your homework and try to apply for loans for which you are likely to qualify. If you review your credit reports and see an inquiry listed but don’t recognize the name of the company, make sure it’s not a promotional inquiry. If it is, you were probably sent an offer for pre-approved credit, and have nothing to worry about. (You can opt out of pre-approved offers on the Federal Trade Commission website.) If that’s not the case, the contact information for that company should be listed on your report so you can get in touch. If that information isn’t provided, be sure to ask the credit reporting agency for it. From there, you can work together to remove the error from your credit report.
Credit report mistakes can lead to disqualification for mortgages and car loans, as well as increased insurance premiums and interest rates. In some cases, those mistakes can even prevent you from getting a job.
Consumers have started enlisting community credit repair to dispute negative items on their credit reports.