Simply applying for a loan or credit card can have a negative impact on your credit score, as you may know from hearing the phrase “credit applications ding” your score.
And how bad does it really hurt? The question is, how long do these “dings” remain on your credit report? What’s the distinction between hard and soft credit inquiries, and how do they affect your score?
Considering the significance of a high credit score, these are all valid concerns. It affects the interest rate and, consequently, the monthly payment required to purchase a house or a car, as well as whether or not you are authorized for the best apartments and rental houses. A monthly savings of hundreds of dollars is possible, depending on the interest rate you qualify for on the same loan amount.
As you go in your exploration of loans and credit, it is important to learn how various forms of credit inquiries might impact your score. Then, you should take measures to repair your credit and improve your score as much as possible.
Inquiries About Hard Credit
Inquiries can have a negative impact on your credit score if they are hard inquiries, also known as hard credit pulls. When you apply for a loan, credit line, or credit card, the lender will perform a hard inquiry on your credit report. Lenders conduct a hard inquiry into your credit history as part of the underwriting process to help them decide whether or not to provide the loan you’ve requested for.
For instance, a loan officer may provide a rough estimate of current interest rates during an initial conversation regarding a mortgage, based on a verbal discussion of your credit history. They ask for a ballpark figure and then give you a breakdown of the costs.
The next step is to submit a full mortgage loan application, which will include a request to check your credit. Your credit report will then be requested as a hard inquiry by the lender who will use it to determine whether or not to provide the mortgage loan.
How Do Hard Inquiries Affect Your Credit Score?
A small number of points are lost from your credit score with each hard inquiry. The term “a few” refers to a drop of between 0 and 5 points on your FICO score and 0 to 10 points on your VantageScore.
These marks are short-lived, appearing on credit reports for no more than two years. However, their negative effects on your credit score fade over time and stop being a factor after a year, so they don’t actually drive it down for the whole two years.
Credit reporting agencies are flexible in order to accommodate borrowers who search around for the best rates. The credit bureaus will often combine many hard inquiries for the same loan type (car loan, mortgage, etc.) into a single hard inquiry if you apply with numerous lenders quickly. The logic here is sound; you only need one car loan, not five, and you want to shop around for the cheapest rate. Similar credit checks are permitted by older FICO scoring models for up to 14 days, but current scoring models, such as FICO 10, provide for 45 days.
You have 30 days before new hard inquiries show up on your credit report, giving you time to finish the loan without affecting your score.
Why Do Hard Inquiries Lower Your Score?
It’s a common complaint that banks prefer to give loans to those who clearly don’t need them. There’s more than just a grain of truth here.
Loans are priced and approved (or not) by lenders depending on the perceived risk. The likelihood of you not being able to pay back a loan decreases as your wealth, income, and track record of on-time bill payment improve.
A high risk borrower is someone who appears or actually is desperately in need of cash. Financial institutions are reluctant to work with the desperate because of the high risk of default they pose.
Applying for credit all around town is a sure sign that you’re desperate for money. In the eyes of lenders, a borrower who applies for three personal loans, six credit cards, a home equity line of credit, and a cash-out refinancing in the span of a week is like a drowning person groping for a line. That’s why credit bureaus include applications for new credit when determining your score.
Soft Credit Inquiries
You won’t see a drop in your credit score from a soft inquiry, but you will with a hard one.
Depending on the credit bureau, they might be included or excluded from your credit report. However, even if they do, it will not have any bearing on your grade.
Soft inquiries are used for purposes other than underwriting an existing application, which is why lenders utilize hard inquiries. One application is to screen prospective borrowers for eligibility before they even apply. This is more of a marketing step than a traditional underwriting step. A soft credit draw occurs, for instance, when you provide your information in order to find out what type of credit card offer you could be eligible for.
Soft queries can also be made through self-initiated credit pulls, such as when requesting your free credit report once a year. Credit checks conducted by potential employers as part of the employment process are also considered soft enquiries.
In fact, it is best practice to do a soft inquiry whenever a credit report is requested as part of a larger background check. Soft credit checks aren’t required to get your consent before they’re made. Hard credit checks are essential in the credit application process.
How to Reduce Hard Credit Pulls
Prioritizing applying for credit when doing so is necessary or strategically beneficial.
Instead of applying for 15 different retail credit cards, apply for 1-2 cash-back credit cards or travel reward cards with big limits and low interest rates. Save up the money for your home renovations instead of taking out a loan.
If you need a car loan or a mortgage, don’t stretch out your research over a few months; do it all at once. Instead of letting many lenders pull your credit, it’s best to do it all on your own and then just approve your final option to do so.
In fact, once a year is the very minimum for pulling your own credit report and checking it for inaccuracies. Check the credit queries as well as any accounts that don’t belong to you. Did you really submit your application to every single lender? If not, a thief might use your personal information to open credit cards in their name and build up as much debt as possible.
You may get rid of these queries by disputing them with the credit reporting companies, a procedure that is free and surprisingly straightforward.
Last but not least, if you are unsure if a credit draw is harsh or soft, you should always inquire. When assessing tenant applications, some property managers and landlords use soft credit inquiries, while others conduct hard credit pulls. Telcos and utilities are in the same boat.
How Do Hard Inquiries Fit Into Your Credit Score?
Hard inquiries have the smallest influence of any scoring element, so you shouldn’t lose sleep about them. Your payment history constitutes the largest portion of your score. Your credit score will plummet if you have a history of paying even one payment late.
Credit usage, or the amount of debt relative to available credit, is second only to payment history when determining creditworthiness. Let’s pretend you have a $10,000 credit card limit but always use $5,000 worth of it. Your credit score will take a hit if you use more than 30% of your available credit at any given time. Always try to pay off your credit card balance in full each month to minimize or eliminate interest charges.
The average age of your credit accounts has a significant influence on your credit score, ranking third among the most important factors. The longer the age, the more evidence there is of proper debt management.
Varieties of credit accounts are the fourth factor to consider. Credit agencies want to see a diverse range of credit accounts in a consumer’s credit history, since this demonstrates a healthy ability to manage credit.
Inquiries have a negligible bearing on your final grade. If you want to raise your credit score, the first thing you should do is become diligent about paying your bills on time and reducing any outstanding amounts you may have.
Hard credit checks are nothing to be afraid of if you handle your own finances and obligations in a responsible manner. Your credit score will not drop if you shop around for a mortgage, car loan, or educational loan. However, your credit score will take a hit if you give in to every credit card offer you see in a store or apply for every credit card you can locate.
Hard credit queries can temporarily and marginally lower your score, whereas soft inquiries have no effect. If you can keep your debt loads manageable, make your payments on time, and use prudence when opening new lines of credit, you won’t have to worry too much about harsh inquiries hurting your credit.