Your credit score has a big effect on your financial well-being. A good score is essential to access favorable interest rates and loan terms. Your score can even determine whether you get offered the job you want or qualify to rent an apartment.
Paying your bills on time and keeping your credit usage low are big parts of maintaining good credit, but there’s more to it than that. Understanding what actions impact your score and credit report is the first step to practicing good financial habits and boosting your creditworthiness. Credit inquiries are one often overlooked factor that makes up your credit score. Learn more about what they are and how they impact your credit.
What Is a Credit Inquiry?
Credit inquiries are examinations of your credit file made by potential lenders, employers, or landlords to assess your creditworthiness. They check into your credit utilization, payment history, types of credit, the age of your credit accounts, and the total length of your credit history to determine if you are responsible and therefore a good candidate for the loan, job, or apartment. Credit inquiries consist of 10% of your FICO score.
Hard Inquiries vs. Soft Inquiries
There are two kinds of credit inquiries. Hard inquiries, or hard pulls, happen when you apply for a new financial commitment like a line of credit, home loan, or a credit card. The potential creditor or company assessing your financial responsibility accesses your credit report to determine the likelihood that you will pay your loan as agreed, or if you have a higher risk of late payments or defaulting. These types of inquiries can lower your credit score and include:
- New credit card applications
- Mortgage, car, and personal loan applications
- Apartment rental applications
- Utility applications
Soft inquiries do not impact your credit. They normally look for information as part of a background check or to determine if you prequalify for credit offers. The following are soft inquiries:
- Prequalified credit card, loan, and insurance offers
- Insurance quotes
- Employer credit checks
- Credit limit increases or decreases on existing credit cards
- Credit monitoring services
- Credit score access through banking apps
- Checking your own credit report or score
You must always give your consent for a hard pull to your credit report, but some soft inquiries don’t require your permission. Hard pulls will show on your credit report, but soft pulls will not. It’s important to periodically review your credit report to look for signs of fraud or errors that could harm your score.
Signing up for a credit monitoring service is a great way to stay informed. A credit monitoring service sends an alert if your credit report changes so you can take action if an alert indicates fraud or identity theft. Some services also include Identity Theft Protection, which monitors other accounts beyond your credit reports to detect signs of fraud.
How Inquiries Affect Your Credit Score
A single hard inquiry usually lowers your score by less than five points but can reach 10 points per hard pull. This adds up quickly and can make a huge difference in your creditworthiness, especially if your score is on the border between good and bad or good and excellent credit. Hard credit inquiries will remain on your credit report for two years, but FICO typically only considers those from the past year when calculating your score.
You can request your free credit report once each year from all three major credit reporting bureaus (Equifax, TransUnion, and Experian) to see where you stand and check your report for errors. Access all three at once or space them out to check your credit file thrice yearly. This is a smart strategy to ensure everything on your report is accurate. If you find inaccurate information, then follow the credit reporting agency’s instructions to file a dispute. You may need to submit a letter explaining the inaccuracy and provide supporting documentation if available.
Plan Your Rate Shopping to Minimize Credit Impact
If you intend to buy a new home or car, you will likely shop around for the best interest rates and loan terms. This process naturally involves multiple credit inquiries, which may lead you to wonder how it will affect your credit. The good news is that FICO and the credit reporting bureaus understand that searching for the best terms on an installment loan, such as an auto loan, mortgage, or student loan, requires comparing rates from several lenders.
Credit scoring models will consider multiple credit inquiries for the same type of credit as just one inquiry, as long as they take place within 30 to 45 days, depending on the FICO scoring formula the lender uses. The VantageScore model consolidates all inquiries within a two-week period into a single inquiry. Rate shopping does not apply to credit cards. Each application you submit for a new credit card is treated as a separate hard inquiry.
Understanding how credit inquiries impact your score helps you to make better decisions when applying for new credit accounts. If you are looking for a new loan, shop around and compare rates within a set timeframe to take advantage of rate shopping. For other types of credit, space out your applications and be prepared to see the impact on your credit score.
You might also be interested in: 6 Ways to Fix Your Credit After a Bankruptcy
