What Is a Hard Inquiry?
One concept that often puzzles consumers is the notion of a hard inquiry, also known as a hard pull.
At its core, a hard inquiry is a record on your credit report that indicates to future lenders that you’ve applied for credit. It occurs when a financial institution, such as a bank or credit card company, checks your credit report as part of their decision-making process when you apply for a loan, mortgage, or credit card.
Unlike a soft inquiry, which doesn’t affect your credit scores and often occurs when you check your own credit or when a lender pre-approves you for an offer, a hard inquiry can impact your credit score.
Why Do Hard Inquiries Matter?
The significance of hard inquiries lies in their potential to affect your credit scores.
Credit scores, such as those calculated by FICO or VantageScore, are numerical representations of your creditworthiness. These scores are crucial because they influence lenders’ decisions on whether to extend credit to you and at what interest rate.
When a lender sees multiple hard inquiries over a short period, it can signal that you’re facing financial distress or are overextending yourself by seeking access to a lot of credit.
Consequently, this could lead to a slight dip in your credit scores.
Don’t Stress:
It’s important to note that the impact of a single hard inquiry is typically small, often less than five points for most people.Strategic Ways to Minimize Hard Inquiries
If you want to minimize hard inquiries, consider these tips:
- Only apply for credit you reasonably expect to use and be approved for. Avoid unnecessary applications.
- Ask lenders if they issue pre-approvals first before doing a hard pull. This shows serious interest on your part.
- Be aware that rate shopping a mortgage, auto, or student loan within a short window is generally treated as one inquiry.
- Before applying for new credit, check your credit report to understand how many recent inquiries you already have. Too many can signal risk.
- Allow time between credit applications for the impact of inquiries to fade before seeking new financing.
- Initiate your own free soft credit checks rather than applying for unnecessary credit just to check your scores.
Staying strategic about credit applications and timing inquiries appropriately allows you to build your credit profile while minimizing score impacts over the long-term.
When Hard Inquiries Don’t Impact Your Credit
While most applications for credit will result in a hard inquiry, there are some exceptions where your credit won’t be impacted:
- Employer credit checks: Background credit checks by employers typically use a modified credit report that excludes details like scores.
- Pre-approvals: Getting pre-approved for a credit card or loan may not require a hard pull if the lender only reviews limited information like your name, address, and birthdate initially.
- Soft credit checks: Checks of your credit that are visible only to you, such as when you order your free annual credit reports, are considered soft inquiries.
- Business credit checks: Inquiries related to business loans or credit accounts generally do not show up on personal credit reports, unless you personally guarantee the debt.
- Creditor account reviews: Your existing creditors periodically reviewing your account with them does not count as a hard inquiry.
Impact of Hard Inquiries on Credit Reports
Hard inquiries generally stay on your credit report for two years, but their impact on your credit scores diminishes over time. In fact, for scoring purposes, they’re often only considered for the first year.
The frequency of hard inquiries also plays a role. If you’re applying for several credit cards or loans within a short period, it can accumulate and potentially have a more significant impact on your scores.
However, certain types of credit checks, like those for car loans or mortgages, are often treated differently.
Credit scoring models may group multiple inquiries for these types of loans into a single inquiry if they occur within a short period, typically 14 to 45 days, recognizing that you’re likely shopping for the best rates.
Understanding Hard Inquiries During Rate Shopping
Understanding the nuances of hard inquiries is crucial when you’re rate shopping. When you’re in the market for a major loan, like a mortgage or an auto loan, it’s wise to shop around for the best rate.
Since these inquiries might be clustered together, they’ll likely have less of an impact on your credit scores. It’s essential to keep this shopping period relatively brief to ensure they’re treated as a single inquiry for credit scoring purposes.
The Big Picture
It’s important to maintain perspective. While hard inquiries can influence your credit scores, they are just one component of a much larger picture.
Credit scoring models also consider factors such as your payment history, credit utilization (how much credit you’re using compared to your limits), the length of your credit history, and the mix of credit accounts you have.
Therefore, focusing too much on the impact of a single hard inquiry might be missing the forest for the trees. Good credit habits, like paying your bills on time and keeping your credit utilization low, are far more significant in the long run.
Managing Hard Inquiries
- Check Your Credit Report Regularly: It’s essential to review your credit reports from the three major credit bureaus — Equifax, Experian, and TransUnion — at least annually. This will help you identify any hard inquiries and ensure they are legitimate.
- Understand the Consequences: Before applying for a new credit card or loan, understand that it will likely result in a hard inquiry. Weigh the necessity and benefits of the new credit against the potential small, temporary dip in your credit scores.
- Plan Your Applications: If you’re applying for important loans like a mortgage or auto loan, try to limit other applications for credit beforehand to minimize the number of inquiries.
- Dispute Unauthorized Inquiries: If you find hard inquiries on your credit report that you didn’t authorize, you have the right to dispute them with the credit bureaus. Unauthorized inquiries could be a sign of identity theft.
