How Credit Inquiries Compromise Your Credit Scores

Credit inquiry takes place when the lenders check whether or not you are qualifying for any particular line of credit or loan that you plan to take out. Sounds quite obvious? Well, yes, it is!

Mean, why should any lender give out a loan to you, or a credit card, just like that?! It is a question of trust and profit that a lender sees, whenever a potential borrower applies for any form of credit.

In fact, the more is the priority of the debt; the harsher will be the inquiry. And, this is our topic of discussion for the day. We will be discussing the types of inquiries, how they affect your credit score, and for how long do you get to see their impact. These questions are essential for you to get answers to if you want to become an intelligent and smart consumer!

What are Credit Inquiries?

A credit inquiry or credit check is performed by lenders or financial institutions, from whom or which, you apply for credit or any type of loan. This inquiry is made to check your credibility and capacity, to carry the new debt burden, as per your current income and debt handling capability.

The inquiry takes place on your credit report, which reflects your credit history and credit activity pattern. This might sound like a standard verification done by a bank or insurance company, but if the inquiry becomes a hard one, then your credit score is at risk of getting compromised.

Hence, you need to be pretty educated about credit checks and inquiries. You will have to differentiate between a hard inquiry and a soft inquiry, to know, which credit application calls for what type of inquiry, and how it affects your overall credit profile.

What is a soft inquiry and how do soft credit checks impact your credit score?

A soft inquiry does absolutely no harm to your credit score. It is usually done by yourself, or employers, or banks wanting to offer you a pre-approved credit card or loan.

Saying you are applying for a new job, and the employer wants to review your credit profile. The employer will pull out your credit report and make a soft inquiry. The same happens in the background, whenever you get emails or messages from banks who are offering you a pre-approved credit card.

Openly speaking, soft inquiries happen a lot of times, and you don’t have to worry about them, as they don’t hurt your credit score at all!

What is a hard inquiry and how do hard credit checks impact your credit score?

A hard inquiry is the most destructive form of credit check done on your credit report, by creditors, who want to see you as a potential borrower.

Lenders, financial institutions, or at times even insurance companies, perform this hard credit check, to make sure that you can perform all the new financial obligations easily. A hard check, lets the lender weigh the future risk of lending you a new line of credit, or a heavy form of secured debt. There could be chances that you may default on the loan payments, at some point down the line. And, there must be a probable assumption for the lender to identify this risk factor. The calculation is based on many subparts; where your past, current, and near-future income potency will be taken into account. Also, your debt history plays an important role in predicting such risks.

In a hard inquiry, the lender enforces the new debt amount into your credit profile, creating a virtual scenario where a new ‘debt to income ratio’ will be calculated! This step will impact your credit score, as in the moment of this specific calculation, your total debt amount increases, and thereby your credit score decreases.

A hard credit inquiry does affect your score, and more are the numbers of hard inquiries, more will the scores get dinged. But, there is one positive aspect you should be aware of. Not all inquiries are treated the same. When you’re ‘rate shopping for a mortgage, an auto or student loan, FICO ignores multiple checks made within 30 days and rolls them into one hard inquiry. As per the new FICO scoring model – multiple inquiries falling under 45 days, shall be counted as one single hard inquiry. The old model follows 14 days. Hence, you should not stop doing ‘rate shopping’ for any new debt that you hope to take out. Only make sure, that you are stumbling upon the inquires back to back, and not days apart.

Surprisingly, the payday loan approval process usually doesn’t undergo hard credit checks!

How long will hard inquiries impact your credit score?

The big fuss, as leaked by FICO, and credit bureaus, says that a hard inquiry will show up on your credit report for 24 months, from the date of the inquiry. But, it will be only hurting your score for 12 months or so.

However, the power of hard inquiries shouldn’t be underestimated. The number of hard inquiries will increase with the number of unpaid debts. Hence, to avoid hard inquiries in the first place, you should try to keep your credit report clean of all defaulted debts, especially collection accounts! So, it is a wise suggestion that you should pay off all your debts, before applying for new loans or new lines of credit. Moreover, it is better to work with a financial counselor, to understand where you are standing as per your credit profile, and avoid credit inquiries altogether!