What is a Credit Enquiry?

When you ask banks or credit card companies to grant you credit, they request a credit report to evaluate your financial history. This request is termed a credit inquiry or a credit check. It provides a detailed account of your credit history, including your borrowing and repayment activities. In Canada, there are two main types of credit inquiries:

Soft Inquiries

Have you ever received those random pre-approved credit card offers in the mail or had your bank suggest a new product based on a review of your credit? That's usually a result of soft inquiry, sometimes referred to as a soft credit check. It just gives a general idea of your creditworthiness, not the entire picture. For example:

• Personal Credit Checks: When you review your own credit report.

• Pre-Approved Offers: When companies check your credit to offer you pre-approved credit cards or loans.

• Employer Checks: When potential employers review your credit as part of the hiring process.

Hard Inquiries

When you apply for a new loan or credit card, you'll likely see a "hard inquiry" on your credit report. This occurs when a lender requests your entire credit history to assess your creditworthiness. Hard inquiries signify that you've actively engaged in a credit application. Examples include:

• Loan Applications: Applying for a mortgage, car loan, or personal loan.

• Credit Card Applications: When you apply for a new credit card.

• Rental Applications: Some landlords check your credit before approving a lease.

Both soft and hard inquiries play distinct roles within the credit inquiry system. While a soft inquiry provides a quick peek at your financial report without affecting your score, a hard inquiry provides a comprehensive view and can temporarily influence your credit score.

Understanding this distinction is crucial for maintaining healthy credit, as it allows you to recognize when and why your credit report is being accessed, and how those accesses may impact your financial standing. 

How Do Hard Inquiries Affect Your Credit Score?

Hard inquiries can impact your credit score, especially if you have a low credit score. Here's how:

• Score Reduction: Each hard inquiry can lower your credit score by a few points. While this might seem minor, multiple inquiries within a short period can add up, significantly affecting your score.

• Short-Term Impact: Hard inquiries remain on your credit report for up to two years but typically influence your credit score for about one year.

• Perception of Risk: Multiple hard inquiries in a short timeframe can signal to lenders that you're seeking a lot of credit, which might suggest financial instability.

Managing Credit Inquiries with a Low Credit Score

The process of improving your credit score is best understood as 'rebuilding' your credit, not simply 'fixing' it. It requires patience, consistency, and smart financial habits to gradually improve your credit standing. Here are some strategies to manage credit inquiries when you have a low credit score:

• Limit New Credit Applications: Only apply for new credit when necessary. Each application can result in a hard inquiry, so be selective and strategic about when you apply.

• Monitor Your Credit: Regularly check your credit report to ensure accuracy and to be aware of any unauthorized inquiries. In Canada, you can obtain a free copy of your credit report from major credit bureaus like Equifax and TransUnion.

• Space Out Credit Applications: If you need to apply for multiple credit products, try to space out your applications over time. This approach can help minimize the impact of hard inquiries on your credit score.

• Use Pre-Qualification Tools: Some lenders offer pre-qualification checks that don't affect your credit score. These soft inquiries can give you an idea of your approval odds without the risk of a hard inquiry.

• Communicate with Lenders: If you're shopping around for the best rates on loans or mortgages, do so within a 14 to 45-day time frame. Credit scoring models often recognize rate shopping and may count multiple inquiries within a specific timeframe as a single inquiry.

Read: 7 Benefits of Having a Good Credit Score

Additional Tips to Improve Your Credit Score

Managing credit inquiries is a key aspect of maintaining a good credit score, but it's only one piece of the puzzle. Your overall financial habits play a significant role in shaping your creditworthiness. By making smart choices, you can steadily improve your credit score and build a strong financial well-being.

Beyond managing credit inquiries, consider these steps to boost your credit health: 

• Timely Payments: Ensure all your bills, especially credit accounts, are paid on time. Payment history is a significant factor in your credit score.

• Reduce Debt: Aim to lower your credit card balances and overall debt. High credit utilization can negatively impact your score.

• Keep Old Accounts Open: Maintaining long-standing credit accounts can positively influence your credit history length, benefiting your score.

• Diversify Credit Types: Having a mix of credit accounts, such as installment loans and credit cards, can show lenders you manage various credit types responsibly.

Read: How to Improve Your Credit Score

Understanding and managing credit inquiries is quite essential for improving your credit score. By paying close attention to how and when you apply for new credit and implementing broader credit management strategies, you can enhance your credit profile over time. 

Remember, building good credit is a journey that requires patience, discipline, and informed decisions.