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? It’s important to understand how a hard inquiry works because shopping for cheaper credit can save you money. But if you’re not careful, the inquiries that are created as a result of those applications can drop your credit scores, which in turn can result in higher interest rates when you borrow. On a large loan, like those for a car or home, a drop of even a few points can mean you’ll pay a higher interest rate. And that, in turn, may mean you’ll pay more over the life of the loan. In this article, we’ll explain how hard inquiries work, how they differ from soft inquiries, and how both may affect your credit score.
What Is an Inquiry?
An inquiry is created when your credit report is accessed by a lender. 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. The category “new credit” accounts for about 10% of your FICO credit scores, and inquiries are just part of that. 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 are the ones that can affect your credit scores. They indicate that 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 one 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, if a lender sends you a preapproved credit offer, that inquiry is called a “promotional” inquiry, and it’s a soft inquiry. When you check your own credit score, the same thing applies. Similarly, if you already have a credit card or loan with a lender, they may review your account from time to time. The account review inquiry that results 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. (Not sure where your credit stands? You can check two of your scores, updated every 14 days, for free on Credit.com. As we’ve explained, checking your scores will not harm them in any way.)
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 will count all inquiries of one of those types as one, provided they take place within a 14- or 45-day period (depending on the model being used).
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 most likely to qualify. If you review your credit reports and see an inquiry listed but don’t recognize the name of the company, check to make sure it’s not a promotional inquiry. If it is, then you were probably sent an offer for preapproved credit, and that’s nothing to worry about. (You can opt out of preapproved offers.) 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.
This article has been updated. It was originally published September 19, 2013.