If you’ve ever applied for a loan, credit card, or mortgage, you may have heard the term “hard inquiry” pop up. Many people don’t fully understand what a hard inquiry is or how it can impact their credit score. This guide will explain what a hard inquiry means, how it affects your credit, and what you can do to manage its impact.
What is a Hard Inquiry?
A hard inquiry, sometimes referred to as a “hard pull,” happens when a lender or creditor checks your credit report to make a lending decision. This typically occurs when you apply for credit, such as a credit card, mortgage, auto loan, or personal loan. During this process, the lender pulls your credit report to assess your creditworthiness.
Hard Inquiry vs. Soft Inquiry
Before diving deeper, it’s important to distinguish between a hard inquiry and a soft inquiry. A soft inquiry occurs when you check your own credit report, when a lender checks your credit to pre-approve you for an offer, or when an employer reviews your credit as part of a background check. Soft inquiries do not affect your credit score.
On the other hand, a hard inquiry can impact your credit score, as it indicates that you’re actively seeking credit. While soft inquiries are harmless, hard inquiries may slightly lower your credit score and remain on your credit report for up to two years.
How Hard Inquiries Affect Your Credit Score
A common question is, “How does a hard inquiry affect my credit score?” When a hard inquiry is made, it may lower your credit score by a few points. While the impact varies depending on your credit history, generally, one hard inquiry may decrease your score by five to ten points. However, the effect is often temporary, lasting a few months to a year.
Here’s why hard inquiries can impact your credit score:
- Potential for Increased Risk: Multiple hard inquiries in a short period might signal to lenders that you’re taking on too much debt or are in financial trouble. This can make lenders wary, as it might indicate a higher risk of not being able to repay.
- Credit Scoring Models: Credit scoring models, like FICO and VantageScore, consider hard inquiries when calculating your credit score. The reasoning is that opening several credit accounts within a short timeframe represents a greater risk.
- Credit History and Impact: If you have a long and robust credit history, the impact of a hard inquiry will likely be minimal. However, if you have a short credit history or fewer credit accounts, the impact might be more noticeable.
How to Manage Hard Inquiries
While you can’t avoid hard inquiries if you’re applying for credit, there are strategies to manage their impact:
- Limit Credit Applications: Try not to apply for multiple credit cards or loans within a short period. Each application will trigger a hard inquiry, which can lower your score and appear risky to lenders.
- Rate Shopping Grace Period: When you’re shopping for a mortgage, auto loan, or student loan, credit scoring models often treat multiple hard inquiries within a short timeframe as a single inquiry. This period, which is usually 14 to 45 days, allows you to shop for the best rates without significantly impacting your credit score.
- Check Your Credit Report Regularly: Monitoring your credit report helps you track the number of hard inquiries and ensures that only authorized inquiries are present. If you notice any unauthorized hard inquiries, you can dispute them with the credit bureaus.
- Build Strong Credit Habits: Having a good credit history can help mitigate the effects of hard inquiries. Pay your bills on time, keep your credit card balances low, and avoid opening new credit accounts frequently. Strong credit habits can offset the impact of hard inquiries over time.
How Long Do Hard Inquiries Stay on Your Credit Report?
Hard inquiries remain on your credit report for up to two years. However, their impact on your credit score decreases over time. After the first 12 months, hard inquiries typically have little to no effect on your credit score.
In Conclusion
Understanding hard inquiries and how they affect your credit score is essential for managing your credit effectively. While a single hard inquiry isn’t a cause for concern, multiple hard inquiries in a short period can signal risk to lenders and impact your credit score. By managing your credit applications wisely, checking your credit report regularly, and maintaining good credit habits, you can minimize the impact of hard inquiries and maintain a healthy credit score.
Remember, knowledge is power when it comes to your financial health. By staying informed about how credit works, you can make smarter decisions that will benefit your financial future.
