When you apply for credit, such as a credit card, loan, or mortgage, lenders check your credit report to assess your creditworthiness. This check is called a credit inquiry. There are two types of credit inquiries: hard inquiries and soft inquiries. Here’s how each impacts your credit score:
1. Hard Inquiries (Hard Pulls)
A hard inquiry occurs when a lender checks your credit as part of a credit application. This type of inquiry can affect your credit score.
- How it affects your credit score:
- A hard inquiry may cause your credit score to drop by a few points (typically 5-10 points), but the impact is usually temporary.
- Multiple hard inquiries in a short time (for example, when applying for several credit cards or loans) can have a more significant effect, as it may suggest to lenders that you’re taking on too much debt.
- When the effect is minimal:
- If you have a strong credit history, a single hard inquiry may have little to no impact on your score.
- If you’re shopping around for a mortgage or auto loan, hard inquiries made within a 14-45 day period are often treated as a single inquiry by credit scoring models, reducing their impact.
- How long it stays on your report:
- A hard inquiry remains on your credit report for up to two years, but its impact on your score lessens after a few months.
2. Soft Inquiries (Soft Pulls)
A soft inquiry occurs when you or a third party checks your credit for a reason other than a credit application. Soft inquiries do not affect your credit score.
- Examples of soft inquiries:
- Checking your own credit (this is encouraged for monitoring your credit).
- Pre-approval offers from lenders.
- Background checks by potential employers.
- Existing creditors reviewing your credit for potential offers or credit increases.
- How it affects your score:
- Soft inquiries do not impact your score at all. They are used primarily for informational purposes, like pre-approvals or background checks.
Managing Hard Inquiries
To minimize the impact of hard inquiries on your credit score, follow these tips:
- Limit credit applications: Only apply for credit when necessary, as each application generates a hard inquiry.
- Rate shopping in a short period: If you’re looking for a loan (e.g., mortgage or auto loan), submit all your applications within a 14-45 day window to have them counted as a single inquiry.
- Consider pre-qualification: Look for pre-qualification offers from lenders, as they typically involve soft inquiries and won’t hurt your credit score.
- Avoid multiple credit card applications: Applying for several credit cards in a short period can significantly reduce your score. Spread out your applications over several months.
Why Hard Inquiries Matter
Lenders use hard inquiries to assess your financial behavior. A lot of recent credit applications can signal that you’re taking on too much debt or struggling financially, which might make you appear as a higher-risk borrower. This could lead to a lower credit limit or higher interest rates. However, a single inquiry is unlikely to drastically affect your chances of approval if your overall credit is in good standing.
Summary:
- Hard inquiries: These happen when you apply for credit and can cause a small, temporary drop in your score. If you have many inquiries in a short period, it could have a more significant impact.
- Soft inquiries: These are checks for informational purposes (e.g., self-checks or pre-approvals) and do not impact your score.
- Minimizing impact: Limit credit applications, shop for loans in a short window, and use pre-qualification tools to avoid unnecessary hard inquiries.
By managing how often you apply for credit and being strategic about your applications, you can minimize the effect of hard inquiries and maintain a strong credit score.