Credit inquiries, also known as credit checks or credit pulls, are an essential part of the lending process. A credit inquiry is a request made by a lender or creditor to one or more of the three major credit bureaus – Experian, Equifax, and TransUnion – to obtain a copy of your credit report. This report provides information on your credit history, including your credit score, payment history, and outstanding debts.
Credit inquiries can have a significant impact on your credit score, which is why it’s crucial to understand how they work and how they affect your overall credit health.
There are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries occur when a lender or creditor pulls your credit report as part of an application for credit, such as a mortgage or credit card. Soft inquiries, on the other hand, do not affect your credit score and occur when a lender or creditor checks your credit for non-credit related purposes, such as when you check your own credit report.
Hard inquiries can have a negative impact on your credit score, but the extent of the impact depends on several factors. One of the most important factors is the number of hard inquiries on your credit report. The more inquiries you have, the more significant the impact on your credit score.
Credit reporting agencies typically count multiple inquiries within a short period, such as two weeks, as a single inquiry. This is because they understand that consumers may be shopping for the best rates on a loan or credit card and need to compare offers from different lenders.
Another factor that affects the impact of hard inquiries is the type of credit being applied for. Applying for multiple credit cards, for example, can be more damaging to your credit score than applying for a mortgage or auto loan. This is because credit card applications are generally seen as a higher risk and can indicate that you are in need of credit, which can negatively affect your score.
Finally, the impact of hard inquiries can vary depending on your overall credit history. If you have a long credit history with a solid payment record, the impact of a hard inquiry may be less severe than if you have a short credit history with missed or late payments.
So, how much can a hard inquiry affect your credit score? While it varies from person to person, a hard inquiry can typically lower your credit score by five to ten points. However, it’s important to note that the impact is temporary and will usually fade within a few months, assuming you continue to make on-time payments and maintain a low credit utilization rate.
It’s also worth noting that some credit inquiries may not have any impact on your credit score at all. For example, when you check your own credit report, it’s considered a soft inquiry and does not affect your score. Similarly, when a lender or creditor pulls your credit report for pre-approval or promotional purposes, it’s typically considered a soft inquiry and does not impact your score.
In conclusion, credit inquiries can have a significant impact on your credit score, but the extent of the impact depends on several factors, including the number of inquiries, the type of credit being applied for, and your overall credit history. While a hard inquiry can lower your score temporarily, the impact is typically minimal and fades within a few months. Ultimately, the key to maintaining a healthy credit score is to make on-time payments, keep your credit utilization rate low, and avoid applying for credit unless necessary.
