Every time you apply for a loan or credit card, the lender pulls your credit. This results in a hard inquiry on your credit report. This means the inquiry remains on your credit report for other future lenders to see. In general, this inquiry will remain there for 2 years. What does this mean for you moving forward? We take a look below.
What is a Hard Inquiry?
There’s a difference between hard inquiries and soft inquiries. A hard inquiry is also known as a hard credit pull. This just means the lender pulls your full credit report. They see your credit score and credit history. They know everything about your history pertaining to your financial life, including previous addresses, and previous employers. A lender may pull from one credit bureau or all three bureaus. Either way, you get hit with an inquiry.
What is a Soft Inquiry?
A soft inquiry is another way for lenders to check your credit. However, it’s more like a background check. They aren’t checking it in an effort to make a lending decision. They are just checking to see what type of risk you are. There are many entities that could conduct a soft inquiry including employers, credit monitoring companies, and even yourself when you check your credit score for accuracy.
How Long Do They Remain
Technically, hard inquiries remain on your credit report for two years, as we discussed above. But, that doesn’t mean they affect your credit score for that long. Basically, they have the largest impact during the first six months following the inquiry. After that, it remains there for lenders to see, but has little to no impact on your credit score.
This is important to know so that you know where you stand with your credit score. Basically, the inquiry affects your credit score for six months because it shows lenders that there might be new outstanding debt. It often takes a while for new debt to be shown on a credit report. This could cause future lenders to make a lending decision they would not make otherwise. With the recent inquiries, lenders know they must proceed with caution.
Could Multiple Inquiries Hurt Your Score?
Having multiple inquiries on your credit report could hurt your credit score. It depends on how close together those inquiries are. One inquiry every few months probably isn’t a big deal. Five inquiries within a 2-week period, however, is a red flag. It shows lenders that are you desperate to find financing so something must be going on.
However, there’s a catch. You can shop around with different lenders for the same product and not get penalized. For example, when you shop for a mortgage, you want to find the lender with the best rate and terms. This may mean applying with three or four lenders. That’s okay as long as you do it within a 30-day period. Most credit bureaus will only hit you for one inquiry in that time because they recognize the need to shop around.
On the other hand, if you had two mortgage inquiries, three credit card inquiries, and a personal loan inquiry, your score would be hit for many hard inquiries because of the depth of the inquiries and the number of them occurring in a short amount of time.
The impact to Your Credit Score
Ultimately, a hard inquiry costs you five points on your credit score. That’s probably not the end of the world, unless you teeter between ‘fair’ and ‘poor’ credit scores, for example. If you have several inquiries that the bureaus don’t count as one, you could find yourself hit with a significant amount of points, which could cause your credit score to suffer.
The bottom line is that you should be very careful when applying for new credit. Think it through – will you take the credit if it’s offered to you? If not, why apply? If you are searching for a good mortgage rate or term, then go ahead and shop around, just make sure you do it within a tight window. If you are trying to find financing to get you out of a dire financial situation, don’t keep applying if one lender turns you down. Finding other resources to help you out will do less damage to your credit score.