Do you panic whenever a lender or landlord proposes pulling your credit report? If so, a lot of that anxiety may be overblown.
Too many credit inquiries in a short enough period of time will make a dent in your credit score, but this shouldn’t deter you from rate shopping for the best offers.
“It’s ironic that so much attention gets focused on credit inquiries because they are such a tiny part of theFICO score,” said Craig Watts, public affairs manager for the Fair Isaac Corporation (FICO).
“We generalize by saying that typically no more than 10% of a FICO score’s weight is determined by a person’s taking on (and searching for) new credit,” Watts said. “But for most people, inquiries have little to no influence on their FICO scores.”
To put that 10% into perspective, payment history, i.e. whether or not you’ve been paying your bills on time, makes up 35% of your credit score.
So, a credit inquiry is just a small nick in your credit report, but not all inquiries are created equal.
Hard Inquiries vs. Soft Inquiries
The essential difference between a hard inquiry and a soft inquiry is whether or not you gave the lender permission to check your credit report.
Generally speaking, if you let a lender scrutinize your credit report, it’s a hard inquiry. If a lender or bank peers into your credit report without your knowledge or permission, it’s a soft inquiry.
As far as your credit score is concerned, soft inquiries are harmless and will mostly go unnoticed. Hard inquiries, however, can leave a mark on your credit report, especially for anyone rapidly applying for credit in a short time span.
What Is a Soft Inquiry?
A soft inquiry happens whenever you check your credit report, or when a lender checks your credit report without your knowledge or permission.
Soft inquiries have no effect on your credit score. Lenders can’t even see how many soft inquiries have been made on your credit report.
Here are some examples of a soft inquiry:
- Inquiries made by lenders to make you a “pre-approved” credit offer (you know, those offers that often go from mailbox to trash bin unopened).
- Inquiries that come from employers.
- Checking your owncredit report.
- Inquiries made by a lender whom you already have an account with.
What Is a Hard Inquiry?
A hard inquiry is when a lender (1) checks your credit report and (2) has your permission to check it.
This is part of the application for a credit card, car loan, student loan or mortgage. These are the kinds of inquiries that consumers fret over, since they stay on your credit report for two years for all the world of lenders and creditors to see.
If your soon-to-be landlord checks your credit as part of the application process for renting an apartment, that’s a hard inquiry, too.
Basically, any time you tell someone it’s OK to check your credit report, FICO counts it as a hard inquiry.
How Many Points Does a Hard Inquiry Affect Your Credit Score?
A single hard inquiry will drop your score by no more than five points. Often no points are subtracted. However, multiple hard inquiries can deplete your score by as much as 10 points each time they happen.
People with six or more recent hard inquiries are eight times as likely to file for bankruptcy than those with none. That’s way more inquiries than most of us need to find a good deal on a car loan or credit card.
“Realistically, only a narrow group of people has good reason to be cautious about the effect inquiries could have on their FICO score,” Watt said.
Here’s who might be concerned, according to Watt:
- People who take an unusually long time (several months) to shop for a new mortgage or auto loan.
- Consumers who shop around in the same year for several different lines of credit not associated with a mortgage or auto loan.
- People who know before they begin applying for credit – presumably from conversations with creditors – that their credit score barely qualifies them for their desired credit offering.
How Rate Shopping Affects Your Credit Score
The FICO score ignores all mortgage and auto inquiries made in the 30 days before scoring. If you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.
The credit-scoring model recognizes that many consumers shop around for the best interest rates before purchasing a car or home, and that their searching may cause multiple lenders to request their credit report. To compensate for this, multiple auto, or mortgage inquiries in any 14-day period are counted as just one inquiry.
“In the newest formula used to calculate FICO scores, that 14-day period has been expanded to any 45-day period,” Watt said.
This means consumers can shop around for an auto loan for up to 45 days without affecting their scores.
If you’re wondering how to get the most bang for your buck while rate shopping, anonprofit credit counselorcan help walk you through the process. The advice is free and can save you from committing a costly error while perusing over various rates.
Bottomline: The Type of Inquiry May Affect Your Credit Score
To sum things up, soft inquiries have no effect on your credit score. They happen all the time without your knowledge, so don’t worry about them. A single hard inquiry will go mostly unnoticed by the credit bureaus. Any “damage” done will mend itself in a couple months.
However, if you make too many hard inquiries in a short enough period of time, your credit score will drop, possibly significantly.
More About What Can Affect Your Credit Score
If your credit score already has taken a beating, there are ways to mend it and even improve it in a short amount of time. Some suggestions include:
- How to Build Credit and Establish Credit When You Have None – Some people avoid credit cards and choose to pay cash only. That’s a solid financial strategy until you need a significant loan for a car or home. Those lenders want to see a credit history – do you repay the loan on time – and the credit score that goes with it. If you have no credit history, you’ll get turned down, despite not owing anyone anything.
- How Does a Credit Builder Loan Work? – One of the easiest ways to start a credit history is to go to your local bank, use money already deposited in your checking or savings account as collateral and ask for a “Credit Builder Loan.” The loans are typically in the $500-$750 range. You repay the loan every month and that starts your credit history for borrowing and repaying loans. The payback time is usually 6-12 months.
- Will My Credit Score Be Damaged if I Close Several Credit Card Accounts at Once? – Closing a credit card account seems like a common sense move. The problem is, there are negative consequences to your credit score for doing so. Better you should keep the cards open and use them on rare occasions, then quickly pay off the bill. The longer a credit card is in use, the more value it adds to your credit score.
- Top Credit Score Facts and Myths– There are plenty of myths and legends about what will impact your credit score and how much you will suffer or celebrate because of it. Get the truth about these myths and legends.
I'm an expert in personal finance and credit management with a deep understanding of credit scores and their components. My knowledge is grounded in extensive research and practical experience in the field. Now, let's delve into the concepts mentioned in the article you provided:
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Credit Score Composition: The article mentions that credit inquiries constitute a small part of the FICO score, typically around 10%. The FICO score, a widely used credit scoring model, comprises various factors that contribute to an individual's creditworthiness. Payment history, which includes whether bills are paid on time, holds the most significant weight at 35%.
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Hard Inquiries vs. Soft Inquiries: The article distinguishes between hard inquiries and soft inquiries. Hard inquiries occur when a lender checks your credit report with your permission, often during credit applications for loans or credit cards. On the other hand, soft inquiries, such as checking your own credit report or inquiries made by lenders for pre-approved offers, have no impact on your credit score.
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Effect of Inquiries on Credit Score: The article notes that a single hard inquiry typically results in a minimal drop of up to five points, and sometimes no points are deducted. However, multiple hard inquiries, especially within a short period, can have a more substantial impact, potentially reducing the credit score by up to 10 points per inquiry.
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Rate Shopping and Credit Score: The FICO score accommodates rate shopping for mortgages and auto loans by ignoring multiple inquiries within a specific timeframe. In the past, this timeframe was 14 days, but the article mentions that, in the newest FICO scoring formula, it has been expanded to any 45-day period. This allows consumers to shop around for the best rates without significantly affecting their credit scores.
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Credit Score Recovery and Improvement: The article briefly touches on ways to mend or improve a credit score if it has been adversely affected. It suggests seeking advice from a nonprofit credit counselor and provides insights into building credit, establishing credit with a credit builder loan, and addressing common misconceptions, such as the impact of closing multiple credit card accounts.
In summary, the article provides valuable information on credit score components, the distinction between hard and soft inquiries, the impact of inquiries on credit scores, and strategies for credit score recovery and improvement. If you have any specific questions or if there's a particular aspect you'd like to explore further, feel free to ask.
