What a Hard Inquiry Really Means to Your Credit Score
When you participate in life by doing things like shopping for a mortgage, financing a car, opening a new credit card or taking on a student loan, the result is a hard inquiry into your creditworthiness, which in turn dings your credit score. But how bad? And for how long?
THE MORE YOU KNOW
Credit scores are like fingerprints—surprisingly unique! The hard inquiries on your credit report create an evolving roadmap of the new credit you’ve applied for. So how do these hard inquiries get on your report in the first place?
The more informed you are about what happens when you apply for a loan, the better you can prepare for the process. Learning about credit inquiries before you go loan shopping will help you prepare for the impact they may have on your credit score.
FIRST THINGS FIRST
Before you begin shopping for, say, a mortgage, get your credit reports and review them to understand the type of information that’s being kept. You’re entitled to a free copy every 12 months from each of the big three nationwide credit bureaus: Equifax, Experian and TransUnion. For your free copies, visit annualcreditreport.com.
INQUIRIES: HARD VS SOFT
When you apply for a loan, and a lender reviews your credit history to determine whether to give you the loan, the lender’s review is recorded on your credit report as a “hard” inquiry.
Lots of hard inquiries over a short period of time are not great. They tell future lenders that you’ve been shopping for a lot of new credit. If, for example, you bought a new car and got a couple of new credit cards, the next time you apply for a loan, the lender may be concerned that you could amass more debt than you’re able to pay back. As a result, they may give you less favorable terms or deny the loan altogether.
Hard inquiries usually stay on your credit report for two years and affect your credit score for one year.
If you’re worried that checking your own credit will negatively affect your credit score, fear not. Pulling your own credit report is recorded as a “soft” inquiry, and will not impact your credit score. In fact, it is a very good idea to keep tabs on your credit and know exactly what information is in your credit report.
WHAT’S THE DAMAGE
According to FICO, the company who helps the big three credit bureaus come up with your numeric credit score (between 300 and 850), you can expect a hard inquiry to temporarily decrease your credit score by five points. But if you have good credit, your score may drop less than that.
EXCEPTION TO THE RULE
If you’ve been shopping for a new car or you’re getting a mortgage, you may see multiple hard inquiries on your report, and you may be thinking, “Hey, that’s not fair!”
Don’t panic. When you’re shopping for a new loan, such as for a home or a car, your information may be sent to multiple lenders to try to find you the best rates and loan terms. You will see a separate inquiry on your credit report from each of these lenders, but your credit score won't be penalized for each one. Most credit scores will count these multiple inquiries as one of they are made within a certain period of time (usually 14-30 days).
But beware, buyer—this grace period exception only applies to things like auto loans, mortgages and student loans. With other types of loans, like credit cards, every hard inquiry will deliver a hit to your credit score.
WEIGH THE CONSEQUENCES
If you’re worried about multiple hard inquiries impacting your credit report, you may be tempted to accept an offer quickly rather than continue shopping while multiple hard inquiries pile up on your credit. But consider your situation carefully before cutting your shopping short. The short-term impact of hard inquiries on your credit score from shopping around may well end up being less than the long-term benefits of finding a loan with more favorable terms.
