You may have heard that a hard inquiry can hurt your credit score. But you may not be sure exactly what that means – what is a hard inquiry anyway?
Here’s why it’s important to understand how a hard inquiry works: shopping for lower cost 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 a car loan or mortgage, 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. So avoiding unnecessary ones can save you money.
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An inquiry is created when your credit report is accessed. 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.
Want to know if inquiries are bringing down your credit score? Get your free credit score from Credit.com along with an explanation of what factors are affecting your score, and an action plan for your credit.
Before we get into the specifics of how a hard inquiry works, it’s important to put them in perspective. Unless you have really 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 a part of that category. As a result, a single inquiry is likely to drop your score by less than 5 points, but only if it’s a hard inquiry, and with the limits described in a moment.
Plus, 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.
Hard Inquiry vs. Soft Inquiry
Hard inquiries are ones that can affect your credit scores. They indicate that you are actively trying to get credit, whether that’s a car loan, mortgage, student loan or credit card.
Soft inquiries, on the other hand, aren’t generated by shopping for credit and they 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. And when you check your own credit score, the same thing applies. Similarly, if you already have a credit card or loan with a lender, it may review your account from time to time and the account review inquiry that results doesn’t show up when lenders request your reports or scores.
Inquiries generated by an employer or an insurance company are also ignored for purposes of calculating your scores.
Do No Harm
There are a couple of ways to help minimize the likelihood that your score will drop due to this factor.
Shop Till You Drop: Looking for a mortgage, car loan, or student loan? 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 which model is being used).
Monitor Your Credit: Check your credit report and your 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. You can monitor your credit score each month for free at Credit.com, and when you do, we’ll match you to credit card and loan offers based on your credit profile and score which should help you save money.
Who’s Checking My Credit?
If you review your credit reports and you see an inquiry listed but you don’t recognize the name of the company listed, first 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 contact them. If that information isn’t provided, ask the credit reporting agency for it.