Your credit score can affect everything from whether you can buy a home to whether you can refinance your student loans. Maybe your score is low because you’ve recently applied for multiple credit cards. That’s okay – it’s never too late to adopt better habits. Before you apply for more credit, let’s take a moment to discuss the difference between hard and soft inquiries.
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Hard vs. Soft Inquiries
An inquiry takes place whenever someone looks at your credit report. When there’s a hard inquiry, a third party pulls your credit report to confirm whether you qualify for new credit. A hard inquiry generally occurs when you allow a lender or creditor to access your credit information because you’re applying for a car loan, a home loan, another credit card, a personal loan or a student loan.
In contrast, a soft inquiry occurs when you want to review your own credit report or a company wants to run a background check. Before you’re hired, an employer might double-check your credit. Having good credit could suggest that you’re likely to be a reliable employee.
Unlike hard inquiries, which can’t take place without your permission, soft inquiries often happen without your knowledge. If credit card applications keep popping up in your mailbox, a soft inquiry was probably done by those card issuers.
In some cases, you might need to ask whether an inquiry counts as a soft or hard inquiry. The following inquiries could fall into either category, depending on the circumstances:
- Opening a new bank account
- Setting up a contract with a cell phone company
- Renting a new apartment
- Buying a cable subscription
- Signing up for Internet access
- Renting a car
- Having your identity checked by a credit union or another financial institution
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What an Inquiry Can Do to Your Credit Score
Soft inquiries have no impact on your credit score, although they may show up on your credit report. So viewing your score every year on annualcreditreport.com won’t ruin your score.
Hard inquiries, on the other hand, can lower your FICO score. One application for new credit is equal to a single hard inquiry. Most of the time, each hard inquiry reduces your score by less than 5 points.
Inquiries normally remain on your credit report for two years. But the FICO scoring model only determines your risk based on the inquiries that occurred in the past year. Since they account for a mere 10% of your score, new credit inquiries won’t damage your score very much unless you have a limited credit history or you’ve applied for multiple lines of credit within a short time frame.
Related Article: 5 Things You’re Getting Wrong About Credit Scores
The Rate-Shopping Loophole
To be safe, it’s important to only fill out applications for credit that you believe you’re eligible for. But you may ask, “What if I’m comparing lenders to find the best loan?” Will all those hard inquiries add up to a substantially lower credit score? There’s one loophole that you’ll want to keep in the back of your mind.
Having your credit report pulled while you’re shopping around for student loans, car loans and mortgages won’t hurt your FICO credit score if it’s done within 30 days. Between 31 and 45 days, all of the inquiries you make while comparing rates can count as one inquiry rather than six or seven. But watch out. If your lender decides to use the old FICO scoring model, your shopping period will last for just 14 days. In other words, it’s best to consolidate your rate shopping into one period of time.
The Takeaway
Hard inquiries are your biggest concern, so it’s best to avoid them unless they’re absolutely necessary. Having lots of hard inquiries on your credit report isn’t a good look. To lenders, it could imply that you’re untrustworthy or desperate for credit, and in the future it might be difficult to qualify for a loan.
Taking a look at your credit report from time to time, though, isn’t a bad idea. In fact, we recommend it! The more familiar you are with what’s on your report, the more likely you’ll be able to catch errors that could be dragging down your score.
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