August 2, 2017 Personal Finance

The straight story about ‘hard’ credit checks

Trying to understand credit scores and credit reports can be frustrating if you don’t know exactly how they work. Did you know that some credit inquiries hurt your credit score, while others won’t? When you apply for credit, the lender makes a credit inquiry and obtains a copy of your credit report. This is referred to as a hard inquiry. Making sense of the hard inquiry gets much easier once you understand some basics.

Each hard inquiry is recorded on your credit report. Hard inquiries may or may not impact your FICO score. FICO, created by the Fair Isaac Corp., is the most widely used credit scoring system of credit reporting agencies. Your FICO score helps lenders to evaluate your credit risk. When analyzing hard inquiries, FICO considers:

Whether a hard inquiry impacts your credit score depends on how much credit you have established. If you have a long history of established credit, a couple of hard inquiries may not affect your score. If you have only a few credit accounts and a short credit history, a couple of hard inquiries may impact your score by five points or more.

Large numbers of inquiries are more likely to hurt your credit score. According to FICO, consumers with six or more inquiries on their credit reports are eight times more likely to file for bankruptcy than people with no inquiries on their report. Hard inquiries remain on your credit report for two years, but they impact your FICO score for only 12 months.

Hard inquiries and rate shopping

When consumers apply for financing for large purchases, such as a house, sometimes they apply with multiple lenders to see who can offer the best interest rate. FICO recognizes this and considers all inquiries that are made within a 45-day period for a mortgage loan, car loan or student loan as a single inquiry.

Difference between hard and soft inquiries

Soft inquiries are credit inquiries that are not made by a prospective lender. These include checking your own credit, credit checks by businesses offering you goods or services such as promotional credit cards, and inquiries made with businesses where you already have a credit account. Additionally, when potential employers check your credit, this is considered a soft inquiry. Soft inquiries don’t affect your credit score.

If you’re concerned about the number of hard inquiries on your account, be sure to ask whether a hard inquiry or soft inquiry is being pulled when you open a new bank account, for example, or sign up for cellphone service.

Records of hard and soft inquiries

Your credit report includes a complete list of all hard and soft credit inquiries for the past two years. If you ever see a hard credit inquiry on your credit report that you don’t recognize, be sure to contact the agency that initiated it. It’s likely a mistake, but it’s also possible that someone fraudulently applied for credit in your name.

You will likely see soft inquiries you don’t recognize. This is common, as credit card companies often run soft inquiries to evaluate your credit to make you offers.