Credit Inquiries Explained: How They Work, Types, and Examples
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Summary:
Credit inquiries are requests for your credit report information made by various parties, including financial institutions, for lending decisions. There are two main types: hard inquiries, which affect your credit score, and soft inquiries, which do not. In this article, we’ll delve into how credit inquiries work, their impact on your credit, and the differences between hard and soft inquiries.
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What is a credit inquiry?
A credit inquiry is a request for your credit report information from a credit bureau. These inquiries are made by various parties, including financial institutions, to assess your creditworthiness. However, credit inquiries can also be initiated for other purposes, such as checking your own credit. There are two primary types of credit inquiries: hard inquiries and soft inquiries.
How a credit inquiry works
A credit inquiry is a request to review your credit history, including payment history and the amount of debt you owe. You can initiate a credit inquiry yourself, or lenders and other entities may request a credit inquiry for various reasons.
There are two main types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries are typically made by lenders as part of the underwriting process when you apply for a loan to assess risk. Soft inquiries, on the other hand, can occur even if you didn’t apply for credit and are often used by credit companies for marketing purposes.
While both types involve accessing your credit report, they have different effects on your credit score. Soft inquiries have no impact on your credit score, while hard inquiries can temporarily lower your score.
Hard credit inquiry
Hard inquiries are requests made by lenders when you apply for credit, such as mortgages or credit cards. Lenders use your Social Security number to initiate a hard credit inquiry to access your full credit report, which helps them in the underwriting process.
A credit report provides information on your credit score and history, including late payments and credit utilization. Hard inquiries can negatively affect your credit score and remain on your credit report for up to two years. Accumulating numerous hard credit inquiries in a short time can be seen as a red flag to lenders, suggesting a higher risk for extending credit.
In some cases, credit repair companies may help remove hard inquiries from your credit report before the typical two-year period.
Hard inquiries may also be used for employment background checks and property rentals.
Soft credit inquiry
Soft credit inquiries can appear on your credit report but do not influence your credit score. These inquiries can be initiated for various purposes, including when you want to review your own credit or when companies want to market products to you.
Many credit card companies offer a free monthly credit score through a soft inquiry. Credit-aggregating services use soft inquiries for pre-approvals, helping borrowers find suitable loans. Lenders may provide borrowers with loan quotes based on a soft inquiry request, aiding them in understanding potential loan terms.
Consumers have the right to obtain a free annual credit report from each of the three major credit bureaus: Experian, TransUnion, and Equifax through AnnualCreditReport.com.
Does a credit inquiry hurt your score?
Whether a credit inquiry affects your credit score depends on several factors. A hard inquiry can negatively impact your credit score, while soft inquiries, such as pre-approvals, do not affect your score.
How long do hard credit inquiries stay on your credit report?
Hard inquiries can remain on your credit report for up to two years, though they typically have a negative effect on your credit score for only one year. Accumulating multiple hard inquiries suggests a need for credit, which lenders may view as a risk.
Do soft inquiries appear on your credit report?
Soft credit inquiries may appear on your credit report but do not influence your credit score. These inquiries can be initiated by yourself when reviewing your credit or by lenders for pre-approval purposes.
The bottom line
A credit inquiry occurs when a party checks your credit report, and it can serve various purposes. The two primary types of credit inquiries are hard and soft. Too many hard inquiries on your credit report can negatively affect your credit score, whereas soft inquiries have no impact.
Frequently asked questions
What is a credit inquiry?
A credit inquiry is a request to access your credit report information, typically made by lenders to assess your creditworthiness or for other purposes.
How do hard inquiries affect my credit score?
Hard inquiries can temporarily lower your credit score and remain on your credit report for up to two years. They are viewed as a sign that you may need credit, which can pose a higher risk to lenders.
Can I check my own credit without affecting my score?
Yes, you can check your own credit using a soft inquiry, which does not impact your credit score.
How can I remove hard inquiries from my credit report?
In some cases, credit repair companies may assist in removing hard inquiries from your credit report before the typical two-year duration.
Are there any circumstances where a hard inquiry might not affect my credit score?
While hard inquiries typically have a negative impact on your credit score, some credit-scoring models may treat multiple inquiries for the same type of loan (like a mortgage or auto loan) as a single inquiry if they occur within a specific time frame, usually around 14 to 45 days. This allows consumers to shop for the best loan terms without significantly damaging their credit.
How can I check my credit report for free to review my inquiries?
You can obtain a free annual credit report from each of the three major credit bureaus (Experian, TransUnion, and Equifax) through AnnualCreditReport.com. This report will include a list of inquiries made to your credit, both hard and soft. Reviewing your credit report regularly is an essential part of managing your credit health.
Can employers see my credit inquiries during a background check?
Yes, some employers may request a copy of your credit report as part of a background check, especially if the job requires financial responsibility. However, these inquiries are typically soft inquiries and do not impact your credit score. Employers are more interested in your financial responsibility and debt management than your credit score.
Key takeaways
- Credit inquiries come in two main types: hard and soft.
- Hard inquiries are made by lenders during the loan application process and can temporarily lower your credit score.
- Soft inquiries, often initiated by individuals or for pre-approvals, do not affect your credit score.
- Understanding the differences between these types of inquiries is crucial for managing your credit effectively.
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