3 Facts You Should Know About Credit Inquiries

January 04, 2016

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One of the biggest frustrations borrowers experience when applying for a new loan comes in the form of a credit inquiry, or credit check, some of which can negatively affect a credit score. A credit inquiry is exactly what the name suggests; it is a record of every time an entity “inquires” or gets a copy of your credit report. There is a lot of confusion about credit inquiries, but not all are negative.

Here’s what you need to know to better understand the different types of credit inquiries and how these will affect your credit score.

What Is the Purpose of a Credit Inquiry?
When applying for credit, the lender will perform a credit inquiry to determine if the applicant is a high- or low-risk borrower.

People with higher FICO scores have a credit history of on-time payments and are therefore considered less risky loan applicants; they are more likely to be approved for a loan and will be given more favorable interest rates.

Loan applicants with lower FICO credit scores are a higher risk for the lender.

How Do Credit Inquiries Affect Your Credit Score?
To understand how credit checks can affect your credit, it is important to understand that there are two types of credit inquiries. Each impacts your credit score differently.

Soft inquiries, or “soft pulls” are the result of creditors seeking candidates for pre-approved offers of credit, credit checks by prospective employers, or individuals checking their own credit score. Soft credit inquiries are reflected  on your credit report but do not change your score.

Hard inquiries, or “hard pulls” are the result of your credit being reviewed by a lender for a credit card, auto loan or mortgage. These credit checks require permission from you first. Your credit score may be lowered up to five points for each inquiry, and the impact may last for up to two years.

Strategies To Protect Your Credit From Inquiries
For most of us, credit inquires are unavoidable. If you plan to get a loan to purchase a car or buy a home, you will have your credit pulled. Here are some tips to prevent impacting your credit negatively from credit inquiries.

Ask about the pull.
It is important to ask prospective creditors which type of credit check they intend to use before authorizing the credit check. Borrowers are often surprised in hindsight.

Keep your loan search short.
FICO ignores inquiries made within 30 days of scoring. Also, your FICO score will consider inquiries that fall inside of a shopping period as a single hard inquiry instead of multiple inquiries.

Know what’s there.
Before applying for credit, review your credit report to make sure there aren’t errors that may negatively affect you.

Plan for hard pulls.
If you have a strong credit score, this is likely not an issue, but if your credit is borderline, plan to spread necessary hard inquires over time. There’s no need to get student loans, car loans, and a mortgage all in one year.

Dispute unauthorized inquiries.
Hard inquiries for which the creditor failed to obtain permission can be removed from your credit report. If you can dispute a hard pull, you should do so.  

As long as you manage your finances well, credit inquires will play a relatively small role in determining your FICO credit score.  If you want to improve your score, do not take credit applications lightly. Apply for credit with care and only if you really need it.  Educating yourself about credit inquiries and how they affect your credit score will help you be a smarter borrower.

Jennifer Bonessi is a member of the DailyWorth Connect program. Read more about the program here.