When you apply for credit, your potential lender will check into your creditworthiness to decide whether they will offer you a credit line. These checks are called inquiries, and there are two kinds. A soft inquiry happens when you check your own credit score, or when a lender sends you a pre-approved offer. It is done with your consent and has no negative effect on your credit score. A hard inquiry, however, does have an impact on your score.
What is a hard inquiry?
A hard inquiry happens when you apply for new credit, like a loan, mortgage, or a credit card. It can also happen when you request an increase on an existing line of credit. A hard inquiry is initiated when one of the three credit bureaus (Experian, Transunion, Equifax) gives someone access to your credit report. Each time this access is granted, it is recorded on your credit report as a hard inquiry.
How does a hard inquiry impact your credit score?
A hard inquiry will affect your credit score, but probably not in the way you think. When most people think of an impact on their credit score, they think of a change in a number. A hard inquiry may cause a small change in your credit score number, but will have a bigger impact on how lenders view your credit report as a whole.
For starters, the evidence of multiple hard inquiries in a short period of time is considered a red flag for many lenders. Because each hard inquiry is connected to a request for new credit, multiple requests for new credit in a short time frame are seen as a credit risk. According to the data analytics company FICO, “People with six or more inquiries on their credit report can be up to eight times more likely to declare bankruptcy than people with no inquiries.”
What this amounts to for your actual credit score, is whether you will be able to raise it further. For example, let’s say you are pre-approved for a credit card. A pre-approved card doesn’t involve a hard inquiry, so you have avoided lowering your score and increased your amount of available credit. This gives you more possibilities to raise your credit score through your credit utilization.
Now let’s say you apply for a credit card instead. Your potential creditor will do a hard inquiry on your credit report. It’s possible the creditor will see that your credit score is not quite what they are looking for and reject your application. The record of the inquiry, however, will stay on your report. And if you apply for another credit card within the same year, the new creditor will see the previous inquiry on your report. It’s possible the combination of your credit score and the previous inquiry will lead to another rejection. You have now added two hard inquiries to your credit report, but no new credit. This lowers your potential to get new credit or raise your credit score.
The exception to the multiple inquiries rule is when you are shopping for rates. Shopping for the best rate on a loan, whether it’s a mortgage, auto loan, or student loan, is not seen as risky behavior. In fact, rate shopping is seen as being financially responsible. For this reason, FICO scores give you a 45-day period to make inquiries for the aforementioned loans. You will see the individual inquiries show up on your report during that period, however FICO will only count them as one single inquiry.
How can you minimize the impact of a hard inquiry?
A hard inquiry stays on your credit report for two years, and is factored into your FICO score for one year. The best way to minimize the impact of a hard inquiry is to do your research. A creditor checking your credit report is considered a hard inquiry. But, when you check your credit report it is considered a soft inquiry, which has no effect on your credit score. So, if you are interested in applying for a new credit card, check to see what the creditor’s ideal credit score range is. Then check your credit report to see if your score falls within the range. If it does, you can feel more confident in moving forward with your application. And if it doesn’t, you can work on improving your credit score to become eligible for the card you want.
Applying for new credit aside, it’s a good practice to keep an eye on your credit report to make sure your accounts are in good standing and free from errors or fraud. Checking your credit report frequently also gives you good information about your accounts to help you maintain or even raise your credit score.
You should also carefully consider whether you really need more credit before applying for new credit. Applying for credit as you need it is a good idea, but there’s no need to respond to every new credit offer that comes your way.