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Having and maintaining an excellent FICO credit score can be the difference between getting approved or denied for a loan, and also influences your interest rates. There are several factors that can have positive or negative effects on a credit score; the three most important being paying your bills on time every month, keeping your credit utilization low, and having only a few credit inquiries.
Credit inquiries, what does that mean? Credit inquiries are requests by a business or bank to check your credit. Maxine Sweet, VP of Public Education for Experian, explained that inquiries are automatically added to your report immediately in order to identify the kind of business making the inquiry. There are two different types of credit inquiries; soft credit inquiries and hard credit inquiries.
Soft Credit Inquiries
There are very distinct differences between the two types of inquiries, with the biggest difference being that one has a negative effect on a credit score while the other is fairly harmless.
Soft credit inquiries, or a soft pull, are inquiries where your credit is not actually reviewed by a lender. Here are a few scenarios where a soft inquiry may take place:
- When you check your own credit score through a free credit monitoring service.
- When you open a new account with a utility company. Some require deposits for equipment if you have poor credit.
- When you’re offered a special promotional rate by a business. This includes those pre-approved credit card offers you receive in the mail.
- When you fill out a loan request to review your options, such as LendingTree.com.
- When you request your own credit report from each of the three credit bureaus.
- If you apply for a new job and they perform a background check.
A soft pull won’t affect your credit, but will show up on your credit report. You can see both soft and hard inquiries on your credit report, which will provide the name of who requested the inquiry and the date. It may be listed under something like “inquiries that do not affect your credit rating.”
Hard Credit Inquiries
Hard credit inquiries, or a hard pull, are the inquiries you need to be cautious about because they will affect your credit, but only by about 5 points or less, depending on your creditworthiness. These types of credit inquiries arise from an action you personally took; in other words, you must give your consent to have your credit report pulled. Here are a few scenarios where a hard inquiry may take place:
- When you apply for an installment account. This includes auto loans, mortgages, home equity lines, student loans, personal loans, and signature loans.
- When you apply for a revolving line of credit. This includes a credit card from a bank or merchant, or a home equity line of credit (HELOC).
This type of credit inquiry pulls your credit report to determine if you are eligible for the line of credit or loan you are requesting. Hard inquiries can stay on your credit report for up to 2 years, and the more recent the inquiry, the more weight it will be given in regards to your current risk level.
Rate Shopping Inquiries
Individuals who apply for too much credit in a short period of time are assumed to be experiencing financial difficulty, making them high-risk to lenders. But when a consumer is rate shopping, applying for loans from different lenders for the same type of loan, those inquiries will typically be lumped into just one hard inquiry. This is done because the credit bureaus know that consumers shop around for the best interest rate.
Anthony Sprauve, former Public Relations Director for FICO, explained that the FICO Score recognizes when someone is shopping for a mortgage or auto loan, and disregards multiple inquiries when they happen in a 45-day window (using the FICO scoring model). Some scoring models have a shorter window of 14 days or less.
Advice on Credit Scores
You shouldn’t be afraid to apply for a loan or line of credit when you need it. Even if you have new hard inquiries, your score will only drop a few points, and are even less negative within a few months. The reason inquiries display on your credit report in the first place is due to the FACT Act. This act requires inquiries to be disclosed if they have any negative impact on your score.
Consumers should not be bogged down by credit inquiries. In fact, inquiries have minimal influence on your overall credit score, and no one will have poor credit if hard and soft inquiries are the only negative factor in their credit report.
The same credit advice does not work the same for everyone. Knowing what your current credit score is and actively monitoring your credit will help you understand and even improve your credit profile.