Credit Inquiries and Your Credit Score

Thank you for joining us again for our series on how to improve your credit score. Last time we reviewed how payment history(https://htlenders.com/franklin/payment-history-and-your-credit-score/) can affect your credit score. This week we will review credit inquiries and your credit score.

As we discussed in the first installment, your credit score is one of the biggest bricks in the foundation of your financial health. These three little numbers can unlock the combination to the American Dream…or they can lock you out in the cold. Paying attention to your credit score is very important because a higher credit score can:

Make it easier to be approved for new lines of credit
Open up access to new loans
Allow you to be approved for the lowest available interest rates when it comes time for you to borrow

To improve your credit score (or to continue to keep your credit score healthy), we’re focusing on a simple step in the process that usually starts with you…Credit Inquiries.

But what exactly is a Credit Inquiry? Simply put, a credit inquiry is a credit check. It is the behind-the-scenes process that happens when a legally permitted entity requests to see your credit score. Anytime anyone pulls your credit report from one of the three national credit bureaus, you will see an inquiry on your credit report.

Are all credit inquiries the same?

The answer is no – not all credit inquiries are the same. Inquiries fall into two categories – Hard or Soft. These inquiries are not treated the same way. One of these indicates a high risk to your credit score and the other does not. Knowing the difference between the two is mandatory for someone who is trying to rebuild their credit score.

What is a soft credit inquiry?

Let’s start with the gentlest of the two…Soft Credit Inquiries. A few examples of a soft credit inquiry can include:

If you apply for preapproval for a loan or credit card
When your credit is pulled for a background check by a company (ie: when you are applying for a job)
When your report is checked by one of your creditors
If you are obtaining a quote from an insurer and they pull your credit
If you check your own credit report

Soft Inquiries are just that…a gentle, tender prodding into your credit background. These soft inquiries do not harm your credit and will not cause you to lose points on your credit score. In fact, these inquiries will only be visible to you and the credit bureaus. They will not be seen by any other companies looking into your credit scores. These soft inquiries remain in the background and are not harmful to your credit worthiness.

What is a hard credit inquiry?

Let’s move on to the real impact…we’re talking Hard Credit Inquiries. These inquiries are tied to more significant movements. These inquiries are the proverbial bull in a china shop and too many of them can negatively impact your credit score. These types of inquires come from moments where you’re applying for things that will significantly suggest you as a risk. Things like:

Applying for student loans
Applications for auto loans
Trying to buy a house and applying for a mortgage
Or – the most slippery slope of all – applying for additional credit cards

“But why do hard credit inquiries lower my credit score??”

This is a question we get asked all the time. People have a hard time understanding the correlation between these types of inquiries and the damage they can do to their credit standing. The answer is actually pretty simple.

Hard credit inquiries signify your concrete desire to get additional credit…which could mean you extending yourself beyond your means. The idea that you may be getting in over your head financially poses a greater risk to your future credit lenders. These hard inquiries tell a lender if you are currently shopping for more credit. When a future lender sees these inquiries and balances them against your credit score, it can be the difference between their comfort in extending to you and denying your request.

Exceptions to the rule.

“But wait! I’m rate shopping and looking for the best interest rate! I have to apply for a few loans in order to get the best deal!” In this case, you can ease your fears. There is a small loophole. If you are obtaining a mortgage, auto, or student loan and are looking for the best rate, these can be counted as a single inquiry provided that they are:

All for the same type of loan
All happen within a certain window of time. This window can vary depending on the credit scoring model used. It can be anywhere from 14-days to 45-days.

*It’s important to note that this exception does not apply to inquiries that pertain to new credit cards. All new credit card loans will likely affect your credit score…just something else to keep in mind!

Exceptions to the rule.

All for the same type of loan
All happen within a certain window of time. This window can vary depending on the credit scoring model used. It can be anywhere from 14-days to 45-days.

Time does matter.

With Hard Inquiries, the number of them + the timeline of them = the assessment of your creditworthiness. Several different types of hard inquiries within a short window of time will have a greater impact on your credit score. These inquiries can leave fingerprints on your credit history for up to two years.

How can I keep inquiries from hurting my credit score BEFORE applying for a loan?

There are a few steps you can take to prevent Hard Inquiries from hurting your credit score, especially before you apply for a new loan.

Know your credit score! Understand what you’re working with so that you can understand how lenders will view your credit worthiness.
Keep your credit card balances in check. In a perfect world, you should pay your balances in full every month and work on paying down any debt in a timely fasion.
Avoid unnecessary applications prior to applying for the ones you really want! If you are seeking a loan for a big purchase (like a car or home loan), AVOID APPLYING FOR NEW CREDIT until after you apply for the loan you want. Save the Hard Inquiries for the things that are most important to you.

Navigating the world of credit health can be a confusing jungle. If you’d like information on your credit worthiness or how we can help you sort through the rubble, contact us for more information!