What You Need to Know About Credit Inquiries and Your Credit Score

review credit report

A credit score is an unavoidable part of financial life. This three-digit number derived from information on your credit report directly impacts your ability to borrow money or access credit. It is one of the indicators used by lenders to assess how likely you are to repay debts in a timely manner. This score also affects how much you’ll pay to borrow money. The more you know about your credit score and what affects it, the easier it will be for you to protect your credit from negative impacts.

What are the different types of inquiries?

Hard inquiries occur when you apply for a credit card, auto loan, mortgage or other loan and the prospective lender or credit card issuer evaluates your credit as part of their lending decision.

A soft inquiry occurs when you check your own credit, apply for a job that requires a background check or when a lender pre-approves you for a credit card or loan.

What are the impacts of each type of credit inquiry?

Both hard and soft inquiries will yield the same information – credit score, payment history, trade lines, etc. The main difference between the two are whether or not you give permission for the credit pull, and whether or not your credit score will be impacted. Let’s take a closer look at each type of inquiry:

Soft inquiries

Soft inquiries are typically considered “promotional” because lenders only use them to indicate if you qualify or are “likely to be approved” for a loan or credit card. Soft inquiries often occur without you even knowing. Since lenders aren’t using them to make a final lending decision or to guarantee approval, soft inquiries don’t impact your credit score.

Hard inquiries

Hard inquiries can slightly lower your credit score but they are a necessary part of the credit and loan application process. The good news is that they cannot occur without your permission, they typically don’t affect your credit score by much, and they only stay on your report for about two years. The impact on your score can vary depending upon your credit history. For example, if you have few accounts, a short credit history and a lot of inquiries, an additional hard inquiry could have a greater impact on your score.

What can you do to protect your credit?

If you’re unsure how a particular inquiry will be classified, ask the company involved to distinguish whether it’s a hard or soft credit inquiry. If it’s ambiguous, ask if you can do a soft inquiry by pulling your own credit report and submitting a copy.

Check your credit report often. Like any other errors on your credit report, you can dispute them directly with the credit bureaus. If there’s a hard inquiry on your report that you did not authorize, call or write to the credit bureau, tell them you didn’t give permission for the inquiry, and ask them to remove it.

Payment history and credit utilization rate are weighted heavily in determining your score. Establish a record of consistent on-time payments and reasonable use of credit to minimize any temporary damage from hard inquiries.

By Amy Malloy