What are Credit Inquiries?
When you want to apply for credit or mortgage, the credit institution will want to know more about your credit information. The financial institution will need to request for that information from a credit reporting bureau. The process of requesting for such information is known as credit inquiries. There are two types of credit inquiry – hard and soft credit inquiries.
Hard Credit Inquiry
Hard inquiries are inquiries made by lenders after you have applied for credit. Typical examples are credit checks made when you apply for a mortgage, credit card, apartment rental, student loans, personal loans, and auto loans. Each of these inquiries counts as individual inquiries and they factored into your credit score separately. However, there are exceptions to this. There are inquiries usually considered as rate shopping. Rate shopping is the act of checking the interest rates on several loan products. If you want an auto loan, credit card, and mortgage, the lender will conduct a credit check on you before considering your application. With this credit check, it is the hard inquiry that is usually done.
However, if you do this rate shopping within a short period of time, they will all be considered as one inquiry. The FICO score will consider all the inquiries within 45 days as a single inquiry. A single hard inquiry may not have a serious impact on your credit score. However, numerous hard inquiries within a short period can have a huge impact on your credit score. When you apply for several credit cards at the same time, lenders and credit card issuers may consider you a high risk borrower. They may even get the impression that you are hard up and they may begin to think twice about offering you credit.
Soft Credit Inquiry
Soft credit inquiries also known as soft pulls occur for a number of reasons. Sometimes credit companies may conduct a soft pull to identify potential customers. Your employer may also make a soft inquiry on your background without your knowledge. Credit card companies and insurance companies may also conduct soft pulls on your account in order to offers and quotes. When you request for your credit report, it also counts as a soft inquiry. Everyone has the right to check his or her report annually. Unlike hard inquiries, soft inquiries do not affect your credit score. They are not even included in your credit report. In most cases, soft inquiries do not need your permission and you may not even know about it.
How to Minimize the Impact of Hard Inquiries on your Credit Score?
Sometimes, the thought of hard inquiries appearing on your credit report may stop you from shopping around for the best rate. There are ways you can still shop around without impacting your credit too much. According to the new FICO calculation formula, all inquiries made for the same loan type within a 45-day period will be considered as a single inquiry.
You can take advantage of this arrangement. When you want to check for rates, set a period aside and do all the inquiries in a single period, preferably, within 45 days. If you do this, the inquiry will impact your score just once.
Sometimes, your credit score may also be impacted for a hard inquiry you know nothing about. This is why is it necessary to regularly check your credit report for errors. If you spot a hard inquiry that you did not give permission for, you should file a dispute for it to be corrected. You can file a dispute by mail to the credit bureau. When filling a dispute, you will need to send a certified letter describing the error. You can attach documents you think can help you prove your case. There are options for you to file disputes online but filing by mail is more effective.
The bureau will respond within 45 days. They will tell you the outcome of their investigation after speaking to the information provider. It is important to dispute hard inquiries you did not consent to because it may be a case of identity theft. It is better to get to the bottom of it. You should, however, note that you can only file disputes for inquiries you did not consent to or know nothing about. You should make sure you did not consent to the inquiry in any way before filing the dispute.
How Can Hard Inquiries Affect your Credit Score?
Numerous credit inquiries can affect your credit score but how many inquiries is too much. As mentioned above, inquiries on the same credit type within a short period are counted as one. However, if you make several inquiries at long intervals, they are counted as individual inquiries. Inquiries stay on your report for up to 2 years. If you have six to eight inquiries on your report, you are likely to lose out on loan approvals. Several inquiries do not make you creditworthy. It is good to note that a single hard inquiry can knock about 5 points off your credit report.
Your credit score determines the kind of credit facilities that are made available to you. A good credit score will help you to access loans at low rates and better terms. It is important to avoid things that will affect your credit negatively. Take time to build your credit; pay your loans on time, take advantage of grace periods for credit cards, and take loans only when you need it. if you can get the required funds from your family or friends, use that alternative. At least you will not be paying a lot of interest.
You should also check your credit report regularly. Since you are allowed a free credit report for all three bureaus annually, you can check one report every 4 months. This means you can decide to check the report for TransUnion in the first quarter, then Experian in the next quarter, and then Equifax in the last quarter. This will help you keep track of entries on your report. When you spot an anomaly, you should seek clarifications. Sometimes, you will need to file a dispute for the bureau to investigate these errors. Although hard inquiries affect only a small percentage of your credit score, your credit may still take a hit due to that small percentage.