How Credit Inquiries Affect Your Score
Your credit score is considered one of the most important factors in determining your financial health. A credit score can affect your interest rate and everything from loan approvals even job applications. Among the many factors that can affect your credit score, credit inquiries also play an important role. So one thing here is crucial to understand how exactly these credit inquiries affect your score. In this article, we are going to find out details about credit inquiries, their types, how they affect your score, and strategies to manage them properly.
What is Credit Inquiry
A credit inquiry is an inspection of your credit report. These credit inquiries are made by lenders, banks, and financial institutions to check your credit history, or credit file that if you have been using your credit responsibly or not. These credit inquiries are recorded by the credit bureaus. However, all credit inquiries are not created equal. There are two main types of inquiries, hard inquiry and soft inquiry.
Hard Inquiry
A hard inquiry, also known as a hard pull, happens when a lender examines your credit score to make a lending decision. This happens when you apply for different types of loans like car loans, online loans, mortgage loans, and credit cards. A hard inquiry indicates that you are applying for loans and it may affect your credit score.
So, it is important to remember that hard inquiry can occur when you apply for:
- Credit card
- Different loans ( home loans, auto loans, personal loans, and installment loans)
- Phone or other utilities
Key Features of Hard Inquiries:
- Affect on Credit Score: A hard inquiry can lower your credit score to some extent, typically it might be between 5 and 10 points. The exact impact varies depending on your overall credit profile.
- Duration on Credit Report: Hard inquiries can remain on your credit report for two years, but their impact on your score will diminish after the first 12 months.
- Multiple Inquiries: If you shop around for a loan and multiple lenders pull your credit within a short period (typically 14 to 45 days, depending on the scoring model), these inquiries are often counted as a single inquiry to minimize the impact on your score.
Soft Inquiry
A soft inquiry or soft pull happens when you or any other wants to check your credit report for a different reason other than lending. This might include checking your credit score for general inquiries, a potential employer conducting a background check, or a credit card company pre-approving you for an offer. These types of inquiries do not affect your credit score.
Key Features Of Soft Inquiries:
- Affect on Credit Score: As we mentioned, soft inquiries do not affect your credit score. They are recorded on your credit report, and they are not visible to lenders.
- Checking your credit, pre-qualification for a loan or credit card, and employer background checks.
How Can Credit Inquiries Affect Your Credit Score
However, hard inquiries do affect your credit score in some way and their impact is usually minimal and temporary. However, it also becomes very important to understand how and when they affect your score because knowing this is also very important to maintain good credit health.
Short-Term Affect
Whenever a hard inquiry is made, it can cause a slight drop in your credit score. For most people, however, the decline is minor—usually between 5 and 10 points. But if you have a strong credit history, this effect is reduced even more. However, if you already have a low credit score or have many recent inquiries, the impact may be more pronounced.
Long-Term Affect
A hard inquiry seems to be quite frightening to hear, but its effect lasts for a certain period. These inquiries stay on your credit report for two years, they only affect your score for the first 12 months. After that, they have no effect. This means that if you plan to apply for a mortgage or car loan soon, it’s wise to avoid unnecessary credit applications in the months leading up to your loan application.
How To Protect Credit Scores from Credit Inquiries
Although credit inquiries are an important part of borrowing, there are several strategies, following which you can minimize the impact on your credit score.
Limit Applications
One of the simplest ways to protect a credit score is to apply for credit only when needed. Each hard inquiry has the potential to lower your score slightly, so avoid applying for multiple credit cards or other types of loans in a short period unless necessary.
Regularly Check Your Credit Report
Monitoring your credit report regularly allows you to stay updated about the inquiries on your report. If you find any unauthorized hard inquiry, you can dispute it with credit bureaus to have it removed. Which will help protect your score.
Utilize Soft Inquiries
Select soft queries over hard queries. For example, if you’re considering applying for a new credit card, see if the issue of a credit card offers a pre-qualification process that uses a soft inquiry. This will allow you to check your chances of approval without affecting your score.
Time Wise Applications
If you already know that you will need to apply for several forms of credit (such as car loans and mortgages), try to group these applications within a short period. Thus, queries are more likely to be treated as a single query, reducing the impact on your score.
Conclusion:
When maintaining a healthy credit score, you have to understand that credit inquiries are only one piece of the puzzle. While there’s no doubt that hard inquiries can cause a slight drop in your score, their impact is usually minimal and temporary. So by understanding how credit inquiries work and taking the right proactive steps to manage them, you can protect your credit score and maintain your financial health.
