You probably know that when you apply for a credit card or any other loan, for a car or a home, for instance, this is referred to as a ‘hard credit check.’ Excessive utilization of credit cards leads to numerous hard inquiries, which will considerably reduce your credit score. But why? In this article, you will discover what hard credit inquiries are and how they impact credit scores in detail.
What is a Hard Credit Inquiry & How Does it work?
A hard inquiry is made when a potential creditor pulls your credit report in order to consider a new application for credit. Common triggers for hard inquiries include applying for a:Common triggers for hard inquiries include applying for a:
- Credit card
- Auto loan
- Mortgage
- Personal loan
- Business loan
While the hard inquiries stem from credit applications that you have made. This is different from soft inquiries that do not affect your scores in any way. The soft inquiries that appear on your credit report are usually as a result of checking your own credit score or job background checks.
In fact, each hard credit check is capable of reducing the scores by 2 to 5 points on each inquiry made. However, not all scoring models that use credit information penalize inquiries. For instance, FICO 10 and VantageScore 4.0 do not consider any inquiries at all. But the majority of the lenders utilize previous generations which do take into consideration.
Hard inquiries lower scores because they indicate that you are applying for credit, which may be seen as a sign of financial instability.
The answer lies in risk, for it is the primary factor that differentiates the two types of training programs. From the lender’s point of view, consumers who apply for a lot of new credit during a particular period are likely to be high risk defaulters. This is the reason why frequently opening of new accounts can be detrimental to your scores.
For example, the scoring models presume that borrowers who have applied for multiple credit within a period of a year or two are likely to be credit hungry. More loans complicate matters when money gets scarce because it becomes difficult to make the required payments.
This means that every application is an attempt to obtain additional available credit. However, even if you intend to use it properly, credit card companies would prefer those who do not push their credit limits to the hilt and incur other credit liabilities. Thus, the scores reduce a little every time you apply, but you at least get an idea of what your chances are.
The Typical Hard Inquiry Score Decreases
For instance, in case your credit score is 760 now. You decide to take an auto loan. Depending on your report, the hard inquiry could reduce your score to 755 after the lender conducts a check.
It is rather irritating though it is not big enough that one would be denied credit or high rates when applying for credit. But now, for instance, assume you also apply for three other credit cards within the next few months. Applying for a new card, results in another hard inquiry on your credit report.
All the new inquiries could then bring your scores down close to the 700 mark. Now the impact is much more significant. While one or two inquires results in minor impacts, several inquires within a short period are likely to be viewed as more risky by lenders.
How Long Inquiries Affect Your Scores
The bright side is hard inquiries impact your scores for a short time only. Here's the typical timeframe inquiries stay on your credit reports:Here's the typical timeframe inquiries stay on your credit reports:
- Equifax – 2 years
- Experian – 2 years
- TransUnion - 2 years
But, their effect on your scores is not as long-lasting as that of the professional organizations. The score drop usually disappears on its own within 6 to 12 months following the inquiry.
For instance, that new car loan inquiry that brought down the TransUnion score by 10 points will not impact within a year. Your credit scores mostly bounce back within 6 months depending on whether other inquiries are made in between.
You can also compensate for the short-term dip by maintaining a good credit standing, meaning paying all bills on time. As time goes on, positive payment history and a low credit utilization rate offset the penalty imposed by new hard inquiries.
Managing Hard Inquiries
To minimize score drop, limit credit application and apply for credit in intervals if necessary. Consider these additional tips:
- The credit reports should be checked before applying for credit, so that the hard inquiries in a batch timeframe are not duplicated.
- Group applications that are done within a short period of time, for instance, a new credit card, and auto loan. Inquiries submitted within a 14-30 day period are frequently bundled together by credit bureaus.
- Keep credit applications to situations where you really need credit. New retail cards or loans ‘‘for the sake of it’ causes more score damage than anything else.
The Effect of Rate Shopping
Applying for the same kind of rate quote for exactly the same kind of loan doesn’t always amount to a hard inquiry on any scoring model. This includes checking the rate within a given period for an auto, mortgage or student loan.
For instance, FICO lumps all mortgage, auto, and student loan inquiries made within a 45-day period as a single inquiry. Thus, the intelligent consumers should reduce the number of hard inquiries by loan shopping predominantly in the 6-week period.
In Summary
Though, do not forget that the decrease in the score due to new hard inquiries is only a short-term impact. The effects of applying for fresh credit are only detrimental for as long as 6 to 12 months. However, this negative effect is gradually offset as the record of positive payment history goes on. Inquiry fears should not prevent you from obtaining credit your household needs but may not be able to afford to pay off right away.
