Every time you ask for any form of credit cards, personal credit, auto credit or mortgage among others, the provider will inevitably refer to your credit report in order to determine whether or not you qualify for the credit being sought. This is referred to as a hard inquiry. Despite the significance of hard inquiries in the credit process, they can decrease your credit scores if made within a short span of time. Check out this post to understand why this occurs and what measures you can take to lessen the effects.
Defining Hard Credit Check
A hard inquiry is when a credit seeker applies for a new credit or when a credit card company checks the credit report of an applicant. This helps them assess your potential for repayments as indicated by your credit history report. While hard inquiries can take up to 2 years to be removed from your credit reports, they only affect your scores for almost one year.
On the other hand, soft inquiries are not a problem and have no impact on your scores in any way. Soft inquiries include checks done by your current creditors to see how you are conducting yourself on your accounts, and when you conduct self-checks on your credit reports. These are associated with credit seeking behavior, which is the reason why large quantities would bring down your scores.
It is necessary to understand how hard inquiries differently influence your credit scores
The more hard inquiries there are within a short span of time, the more the probable impact they will have on your credits scores. However, having one or two over time is acceptable, but five or more within a few months may adversely affect your scores. That is because this can be interpreted as a sign of risk or desperation to creditors. It makes it look as if you are in need of a large amount of credit in a relatively short span of time.
Hard inquiries have some impact on the various forms of credit score models in the following manner
FICO Scores: Hard inquiries make up about 10% of your scores under the most common FICO models. It is unlikely that one new inquiry would cause a significant ripple effect. However, if you had six inquiries over the past year, your scores could go down by five to 20+ points. The more inquiries recently and in a shorter time, the more the potential score drop.
VantageScores: They have less influence on VantageScores, contributing to less than 10% of your scores. Although several in a short period may still reduce your scores in most cases, the effect is not very drastic and only lasts for a short while. Furthermore, VantageScores differentiate between mortgage, auto loan, student loan, and revolving credit inquiries. Credit cards and personal loans lower scores as they are revolving credit inquiries.
How does a hard inquiry affect credit scores and for how long?
Inquiries generally remain on your credit report for 12 months or less. As with other aspects, the actual length of impact varies with the scoring model.
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FICO scores: All the current versions include inquiries for 12 months, while the FICO 8 employed for older versions only comprised 6 months.
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VantageScores: Credit information inquiries stay in the VantageScore credit reports for one year.
Thus, although hard inquiries do not drop out within two years, their adverse impact on new credit is considerably less significant after 12 months. The effects also fade with time in their intensity and can only be felt in a mild or in some cases, moderate way. The scores are only slightly changed for a new inquiry after six months and do not change at all in most cases after one year.
Reducing the Impact of Hard Inquiries on Your Credit Reports
Although some hard inquiries are unavoidable when applying for credit, you can prevent many unnecessary hard inquiries. Here are some tips
Compare rates first: Most of the lenders let you compare the loan quotes and the rates available to you by using soft credit checks, which do not affect your score. Cross-check before formally applying for a job.
Limit applications: Don’t go for credit you are not serious with or don’t need at all. Another drawback of approaching with many applications is that it is dangerous to apply in large numbers within a short time. These are especially damaging when one applies for credit cards or loans using several applications at once. It’s best to apply for one new account at a time as much as possible.
Ask creditors to combine inquiries: When rate shopping loans such as mortgage loans and auto loans, you can request the creditor to group the inquiries conducted within a short span of time—this is done voluntarily. All are considered as one inquiry instead of multiple different ones. This assists in reducing fluctuations in scores that may be detrimental for a short time.
Add authorized users: Another method that will allow credit-building without new applications is becoming an authorized user of other accounts such as family member credit cards. You can enjoy all the credit history without the necessity to face the hard inquiry.
Give it time: Hard inquiries are time-sensitive and cause smaller credit impacts over time. Therefore, make it possible to give your scores the necessary time for rest in between applying for credit.
In general, applications should be limited to the credit you actually need or would like to have at the moment. Also, comparison shop and inquire about bundled inquiries if possible. If one or more scores go down for some reasons, keep on maintaining proper credit behavior since the scores will stabilize in the future. Having hard inquiries is a normal part of the credit application process and therefore they should not cause much worry but however having many hard inquiries within a short period will reduce your credit ratings.
