Understanding how credit works can sometimes feel like solving a difficult puzzle. One part of your credit score that has a big impact is the number of times your credit report is accessed for things like loan or credit card applications. This article explains why these credit report accesses are called hard inquiries and how they affect your credit score.

Impact of Hard Inquiries on Your Credit Score

What is Meant by Inquiries on Credit Scores?

When we talk about inquiries on a credit score, we’re referring to when a bank or financial institution checks your credit report because you’ve applied for credit, like a loan or a credit card. There are two main types: hard inquiries and soft inquiries. Hard inquiries happen when you apply for a loan or credit. Soft inquiries might occur when you check your credit score or when a company does a background check for pre-approval offers. Knowing the difference helps you manage your credit health wisely.

Difference Between a Hard and Soft Inquiry

Hard Inquiry Soft Inquiry
A lender looks at your credit report because you’ve applied for credit, like a loan or a credit card. When you or a company checks your credit report as part of a background check, like when you’re pre-qualified for credit card offers or you check your credit score.
Hard inquiries can slightly lower your credit score for a short time. Soft inquiries do not lower your credit score at all.
Hard inquiries can impact your credit score because they’re tied to an actual credit application. Soft inquiries do not affect your score because they are unrelated to a new credit application.

What is a Hard Inquiry?

A hard inquiry, also known as a hard pull, occurs when a lender reviews your credit report as part of the loan or credit card application process. This differs from a soft inquiry, which happens when you check your credit or a lender checks it for pre-approval offers, as soft inquiries do not affect your credit score. Examples of situations that might trigger a hard inquiry include applying for a mortgage, car loan, credit card, or apartment rental.

The most common scenario where hard inquiry is included is:

  • Applying for loans (personal, car, house, etc.)
  • Purchasing a house or a car
  • Applying for a new credit card in the last two years
  • Renting out an apartment

Impact of Hard Inquiries on Credit Score

Even in the short term, hard inquiries have a negative impact on your credit score. When a lender carries out a hard inquiry, it’s essentially looking to assess how risky it would be to lend you money or extend credit to you. Hard inquiries are factored into your credit score, which 90% of top lenders use. Mentioned below are some points that tell us how hard inquiries impact your score:

Quantitative Impact

Typically, a single hard inquiry could lower your credit score by five points or less. However, the exact impact varies depending on your overall credit health.

Multiple Inquiries Might Add Up

If you have several hard inquiries in a short period, the combined effect can make a more significant dent in your credit score. It signals lenders that you may be taking on new debt, which could be risky.

No Impact After One Year

Hard inquiries stay on your credit report for up to two years, but their effect on your credit score disappears after one year.

Rate Shopping

Recognizing that consumers should be able to shop around for the best loan rates, scoring models give you a grace period to do so. Usually, multiple inquiries for certain types of loans (like auto and mortgage) are generally treated as a single inquiry within a 14-45 day period.

While hard inquiries affect your credit score, their impact is minor compared to high balances, missed payments, and other credit factors. Responsible credit use is key to minimizing their effect.

Impact of Having Multiple Inquiries

When you’re looking to understand how your credit score might be affected, it’s important to know that one or two inquiries on your credit usually don’t change much. However, if you start having a lot of these checks in a short period, it might be a different story. Each time a lender checks your credit score, it’s recorded. If there are many of these hard inquiries, lenders might think twice about lending to you. They see it as a risk because, in their eyes, you might be trying to take on a lot of debt very quickly. So, having too many inquiries in a short time can make it harder for you to borrow money, as lenders might see you as a riskier person to lend to.

Bottom Line

Hard inquiries can temporarily lower your credit score; their impact is manageable and should not prevent you from seeking credit when needed. With smart strategies and responsible credit behavior, you can ensure these inquiries have minimal effect on your financial health. Managing hard inquiries is just one aspect of maintaining a good credit score. Still, it’s important to highlight the importance of being informed and cautious about applying for new credit.

Remember, hard credit inquiries cannot be avoided, but you can lessen their impact. To maintain a good credit score, pay your bills on time, keep your credit card balances low, and manage your debts responsibly. Doing this will help you build and keep a strong credit score, making you an attractive borrower to lenders even with occasional hard inquiries.

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