Whenever you fill out an application for any credit such as a credit card, an auto loan or even a mortgage the lender will pull a credit report on you in a process called ‘hard inquiry’. This enables them to assess your creditworthiness before they give you credit.
Hard inquiries are not very damaging to credit scores but can reduce your scores slightly. However, the effect is generally rather minor and is not long-lasting in the majority of cases. Let us see how credit inquiries impact your scores and what this entails for you below.
A credit inquiry refers to the act of accessing one’s credit report by a credit bureau or any other third party legally entitled to do so.
Credit inquiry refers to when a business pulls your credit report. There are two main types of credit inquiries:There are two main types of credit inquiries:
Hard inquiry – This is when you apply for a new credit like credit card, personal loan, or mortgage, the credit reporting agency pulls the credit and this is referred to as a hard inquiry. This enables them to scrutinize your credit report and assess your application as well. Hard inquiries can reduce your credit score by a few points but this is often temporary.
Soft inquiry – Soft inquiries occur when an individual checks on his/hercredit score, or when a business does so without express consent from the credit holder. Soft inquiries can be done by potential employers and insurance companies. They aren’t a factor when it comes to your credit scores at all.
What are the impacts of hard credit inquiries?
Often when you apply for new credit, majority of the lenders will show an interest in checking your credit reports which leads to the formation of the hard inquiry. Hearing multiple hard inquiries in a short period can lead to lower credit scores as it shows increased credit risk.
Mainstream credit bureaus, including FICO, say that a hard inquiry can reduce the credit score of a perfectly eligible candidate by around 5 points. However, for most people the dip is probably even less, between 1 or 2 points per inquiry.
Your exact scores will depend on your general credit history. Thus, if you already have late payments or high balances, the impact of inquiries will be negligible. Those with superior credit ratings are likely to experience slightly higher fluctuations.
The impact also depends on how many credit reports each inquiry shows up on:The impact also depends on how many credit reports each inquiry shows up on:
Experian, Equifax and Trans Union – If the inquiry shows on all three credit reports, then your score in all the three credit bureaus may slightly drop.
Single or dual bureau - It means that the inquiry is only done in one or two bureaus therefore effecting only those scores.
For instance, if a mortgage lender accesses your Equifax report, you may notice several points being shaved off your Equifax credit scores. But your Experian and TransUnion scores remain the same.
When reviewing your own scores, try to find out what led to the change in your credit score. In regards to the average individual, it is insignificant compared to balances or even payment history.
For how long are my credit inquiries considered by the scores?
While hard inquiries do remain on your credit reports for two years, their impact is not very long-lasting if you had good to excellent credit from the start. Here is the typical timeline:Here is the typical timeline:
0-1 months – This means that you can be denied credit, loans or even employment due to the worst effects on your credit scores. Each inquiry could reduce most scores by several points.
2-3 months - The inquiries become less relevant and have reduced effect on the scores.
4-6 months – Credit reporting agencies do not factor in inquiries made by creditors beyond this period, hence, it does not impact on the credit scores.
6-12 months – For the few credit scoring models that consider inquiries for up to one year, the effect that they have is minimal at this stage.
12+ months – Credit inquiries do not contribute to credit scores once again after 12 months. At this point there is no credit risk either.
When you are rate searching for an auto or mortgage loan, credit bureaus comprehend multiple lenders might pull your reports although all of the hard inquiries may decrease your ratings slightly at the start.
In the first instance, you are permitted to shop for a loan within a period of 45 days; thus, you can group all the bureaus in one, and the impact of the inquiries will not be very bad. This can help you to be flexible and look for your lowest rates. It is also important to note that after 45 days, additional inquiries will appear as distinct and can impact your credit scores in a greater way.
Ways to Monitor Credit Check
Any hard and soft credit inquiries made at least in the last two years will reflect on your Equifax, Experian, and TransUnion credit reports. It is also useful once in a while to go through your reports to see if there is any company that made a hard inquiry that you did not authorize or request. Here are some ways to check your credit reports and see recent inquiries:Here are some ways to check your credit reports and see recent inquiries:
The free credit reports – Federal law provides a provision which entitles individuals to one free credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion every year through AnnualCreditReport. com. When going through each report, look through for all credit inquiries over at least the past few years.
Review credit monitoring service - You can also have your TransUnion and Equifax credit reports through the credit monitoring site you are subscribed to, be it Credit Karma or IdentityForce, among others, for monthly updates. These services are either free or charged at a very low cost.
Check your credit card accounts – Some credit card companies, such as Chase, American Express, or Discover, offer free access for cardholders to one credit bureau report or FICO scores. There might be inquiries there as well.
It is also important to note that not all hard inquiries are reported to all the three credit bureaus, therefore one should check all the three credit bureaus if possible. This can enable you to have a holistic view of companies who have pulled your credit.
If, for instance, you find a hard credit inquiry that you never requested from a company you never applied for credit with, you should probably follow it up in case someone has fraudulently pulled your credit report. The fraudulent inquiries can be deleted by writing to the credit bureau and disputing the entries.
Options for Mitigating the Effects of Hard Credit Check
It has been found that the impacts of credit inquiries are minor and fleeting for most individuals who seek credit from time to time. But if you’re rate shopping and need to complete many applications over a short period, consider these tips to help minimize scoring impacts:But if you’re rate shopping and need to complete many applications over a short period, consider these tips to help minimize scoring impacts:
Use only if really interested – Each inquiry may lower your scores a little, so don’t applyunless you are ready to accept reasonable loan interest rates.
Do not shop around for rates for longer than 45 days-The credit bureau will allow a consumer to comparison shop for rates to get a mortgage or car loan within a period of 45 days. However, if there are several inquiries within the same period, credit bureaus tend to combine them.
Space your credit applications - Don’t apply for credit immediately after the previous one; wait at least six months to one year if possible. This enables previous inquiries to leave your credit reports.
Inquire about preapprovals – Some lenders provide pre-approval credit checks as soft inquiries initially, and a hard inquiry is only done on your credit reports once you proceed. This means that doing a hard search will be unnecessary in case you realize that such specific lender’s loans are not adequate.
Maintain your credit – While credit inquiries do deduct a few points, having good credit generally can counteract the potential damage. Make all payments on time and reduce credit utilization to ensure the highest credit rating possible.
Freeze those that are not in use- In case you are not going to be using one of the credit reports for a while, place a freeze security on it. Any hard inquiries, therefore, will not appear on the frozen reports unless the freeze is temporarily lifted, which reduces score effects. Just be sure to lift the freeze when you need to apply for credit once again.
It is common for most people to experience minor fluctuations mainly due to expected hard inquiries from the credit applications they make. So verify your reports but do not get concerned with these effects for short-term provided that you’re consistent with your credit care strategies.
