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Building and maintaining a respectable credit score takes time and patience, so the last thing you want to do is make a careless mistake that can cause your numbers to plummet.
Knowing the difference between a hard and soft inquiry of your credit history can help prevent a sudden drop in your credit score, which can make all the difference if you’re in the market for a car loan, mortgage, looking to lease a new apartment or even applying for a new credit card.
In this article:
- What is a hard inquiry?
- How do hard inquiries affect your credit score?
- What is a soft inquiry?
- How do soft inquiries affect your credit score?
- How to lessen the credit score impact of hard inquiries
What is a hard inquiry?
When you apply for credit in the form of a loan or credit card, for example, a lender will pull one or more credit reports to check your creditworthiness. This is called a “hard” inquiry.
Below are examples of products or services that will generate a hard inquiry on your credit report:
- Credit card
- Personal or business loan
- Car loan or lease
- Cellphone contract
- Requesting a credit line increase (if you initiate the request)
- New utilities customer
- Apartment or home lease
- Car insurance
- Student loans
Prior to running a credit check, the consumer is generally asked for permission or notified that a credit check will be performed. However, if a lender or other service provider has “permissible purpose” as defined by the Fair Credit Reporting Act to check your credit, consent is implied and not required, such as when you apply for a credit card.
How do hard inquiries affect your credit score?
The good news is that hard inquiries don’t stay on your credit reports forever — they fall off your credit report after two years, but only impact your credit score for one year. Each inquiry can negatively impact your score by 5 to 10 points, according to FICO. If your credit score is low, losing valuable points will have much more impact than if your score is above, say, 750. For example, if your credit score is 670 and a hard inquiry knocks it down to 665, you’ll have gone from a good credit score to a fair one, according to Experian’s credit score breakdown.
The credit bureaus do cut people a break when shopping rates for home mortgages, or student or car loans from multiple lenders, as long as the “rate shopping” occurs within a period of about 30 days. For example, if you are seeking a new car loan and apply for funds from multiple lenders within a 30-day period, the credit bureaus lump these together as a single inquiry.
So it pays to know how much a credit application will or won’t cost your credit score in terms of points deducted before you sign on the dotted line.
What is a soft inquiry?
A soft inquiry happens when a lender reviews your credit for marketing purposes, such as when a credit card lender sends you a pre-approval offer in the mail or via email. Potential lenders will often review credit reports in search of new customers who fit their credit profile. And when you check your own credit score or credit report? That’s also considered a soft inquiry.
If you aren’t sure if an action you or a service provider is taking will generate either a soft or hard pull of your credit reports, ask. But know that checking that free credit score your bank or credit card provides is considered a soft inquiry.
How do soft inquiries affect your credit score?
Soft inquiries do not impact your credit score. If you pull your own credit report from one of the credit bureaus, those inquiries will be visible to you, but not to other lenders.
How to lessen the credit score impact of hard inquiries
When trying to protect the integrity of your credit score, it helps to be very strategic about applying for new credit and knowing what types of services may generate a hard inquiry. Unless you are rate shopping, as discussed above, the best way to protect your score from dropping is to apply for new credit sparingly.
If you get rejected for a new credit card, for example, what you don’t want to do is immediately apply for another one. Allow your credit score to recover from any hard inquiry damage before you move on to another card or loan application. This is especially important for folks with marginal credit scores; not so much for those with excellent credit scores.
Tread lightly when applying for new credit and if the impact of multiple hard inquiries knocks your score too far down, know that it’s temporary and will recover over time.