How do Credit Inquiries Affect Your Credit Score?

As you navigate the world of credit, one factor that can significantly influence your credit score is credit inquiries. But what exactly are credit inquiries, and how do they affect your credit? 

There are two primary types of credit inquiries: hard credit checks and soft credit checks. Each serves a different purpose and can affect your credit scores differently.

In this blog, we will explore the differences between hard and soft credit inquiries, their significance in the lending process, and essential tips to manage them wisely. 

 

What is a Hard Credit Check?

 

A hard credit check, also known as a "hard pull" or "hard inquiry," occurs when a financial institution, such as a lender or credit card issuer, checks your credit history to make a lending decision. It involves a comprehensive review of your credit history.

When you apply for a loan or a credit card, the lender may perform a hard inquiry to assess your creditworthiness. Hard inquiries are recorded on your credit report and may have a slight negative impact on your credit scores.

 

Common Hard Credit Checks: 

• Car loan applications

• Credit card applications

• Mortgage applications

• Personal loan applications

• Apartment rental applications

 

Read: All You Need To Know About Car Loans in Canada

 

Can a Hard Credit Check Affect Your Credit Score?

 

When a hard inquiry is made, it is recorded on your credit report and can cause a slight decrease in your credit scores. Multiple hard inquiries within a short period may signal risk to lenders.

When shopping for a loan, such as a mortgage, you may encounter multiple hard credit checks. Fortunately, credit bureaus offer a grace period during which multiple inquiries within a 14 to 45-day timeframe are counted as one, reducing the impact on your credit scores. 

Hard inquiries are removed from your credit reports after two years, while their impact on your credit scores may last for only a year or even just a few months in some cases.

 

Read: How to improve your credit score?

 

How to Minimize the Impact of Hard Credit Checks on Credit Scores

 

a. Apply for credit only when necessary.

b. Research and apply with lenders whose minimum requirements you meet.

c. Take advantage of the grace period when shopping for loans.

d. Regularly check your credit report for inaccuracies and unknown inquiries.

e. Use credit responsibly by paying off debts promptly and maintaining a low credit utilization ratio.

 

What is a Soft Credit Check?

 

A soft credit check, also referred to as a "soft pull" or "soft inquiry," takes place when a person or company checks your credit as part of a background check. 

This can happen when a credit card issuer prequalifies you for certain credit card offers or when your employer conducts a background check before hiring you. A soft credit check provides limited information and is visible only to you and the entity that performed the check.

 

Common soft credit checks:

• Personal credit checks

• "Prequalified" credit card or other credit product offers

• Employment background checks by potential employers

• Insurance premium evaluations based on credit history

 

Can a Soft Credit Check Affect Your Credit Scores?

 

Soft inquiries do not impact your credit scores and are visible only to you and the entity that performed the check. Unlike hard inquiries, soft credit checks can be performed without your explicit permission.

 

Read: What is a Credit Bureau and How Does it Work?

 

Can Checking Your Own Credit Scores Have a Negative Impact on the Scores?

 

Checking your credit scores on your own does not result in a hard inquiry. It is considered a soft credit check, and it does not impact your credit scores. You can access your VantageScore 3.0 credit scores from major credit bureaus like Equifax and TransUnion for free on Credit Karma as frequently as you like without any effect on your credit scores.

 

Disputing Hard Credit Inquiries

 

To safeguard your credit report, it is advisable to regularly review your credit reports. If you discover any errors, such as a hard inquiry that was made without your authorization, you can dispute it with the credit bureau. For additional assistance, you can also reach out to the Consumer Financial Protection Bureau (CFPB).

However, note that you can only dispute hard inquiries that were made without your permission. If you have authorized a hard inquiry, it will generally remain on your credit reports for about two years before falling off.

 

What Type of Information Shows Up for Soft Credit Checks vs. Hard Credit Checks?

 

Soft credit checks offer a basic overview of your credit report, while hard credit checks provide a more comprehensive report for lenders to evaluate.

In conclusion, understanding the difference between hard and soft credit checks is crucial for managing your credit effectively. By being mindful of hard inquiries and taking steps to reduce their impact, you can maintain a healthy credit profile and improve your overall financial well-being. Additionally, knowing that soft inquiries have no effect on your credit scores can offer peace of mind when undergoing background checks or insurance assessments.