Understanding credit inquiries can help you protect your credit
When you apply for a new loan or credit card, you are probably aware that the potential creditor will pull your credit report and score. What you may not know is how those credit checks can impact your credit score and, consequently, the interest rate you pay. Fortunately, you can minimize these negative effects by learning the difference between so-called "hard" and "soft" credit checks and how to keep the hard ones to a minimum.
Credit inquiries defined
There are two types of credit inquiries: hard and soft. When you apply for credit — be it a store credit card, a car loan or a home loan—the lender pulls your credit report. This is a hard credit inquiry.
A soft credit inquiry happens when your credit report is checked but you haven’t applied for credit. For example, insurance companies or potential landlords may check your credit report to assess risk; potential employers may do background checks and credit card companies may check your report to send you pre-approved promotional offers.
The science of hard and soft credit inquiries
Soft inquiries do not affect your credit score. Hard inquiries do.
Here’s how it works: Each time you apply for credit, your credit score drops a little bit—usually less than five points per inquiry, according to myFICO.com. That’s because seeking new credit can make you seem like more of a risk for lenders.
Hard credit checks are occasionally conducted multiple times for a specific item like a car loan or a mortgage. These can happen within a certain time frame — FICO calls them shopping periods and while each lender may use a different formula to calculate a shopping period, it’s typically 14–45 days. This means that multiple inquiries during this time are usually treated as a single inquiry on your credit score.
The impact of hard inquiries
New lines of credit represent only 10 percent of your score, according to myFICO.com, so the damage to your credit score from hard inquiries is typically minimal. But that doesn’t mean you’re in the clear to rack up hard credit inquiries:
Protect your credit
To keep your credit score healthy, limit the number of hard inquiries. Say "no, thanks" to those store credit cards offered to you at checkout if they don't make sense in your larger financial picture. If you're going rate shopping for a car or house loan, make sure to do so within a 14- to 45-day window so that multiple inquiries will be recorded as one. Also keep an eye on your credit report. If you see a hard inquiry on your report that you did not initiate, take action to protect yourself from identity theft