“Can I see your credit report?” You will often have a money lender ask.
Credit scores are essential to our financial life. Thus, keeping them up is vital.
Certain factors like payment history, utilization rate, public records, and credit period affect your interest rates. Another ignored factor is credit inquiries.
Yes, checking your credit score affects your credit health.
The frequently forgotten credit inquiries contribute to around 10% of your credit score. Yet, it is usually deemed insignificant.
However, this insignificant factor could be the difference between a good and excellent score.
You need to manage the frequency of credit checks on your accounts. This article explores credit inquiries, how they affect your credit score and how to avoid them.
What are Credit Inquiries?
A credit inquiry is simply a look into your credit report. Credit inquiries occur when you or any authorized party requests your credit report. The other third parties include your bank, lender, employer, or landlords.
Credit bureaus record inquiries in your report whenever an inquiry occurs. They reveal the risk you pose to lenders.
While not all inquiries affect your credit score, some are important to lenders. The two types of recorded inquiries are hard and soft credit inquiries.
What are Soft Credit Inquiries?
Soft credit inquiries are recorded when you ask for your credit report or receive a free report. Soft credit inquiries are usually background checks and do not affect your credit score.
Soft inquiries do not reflect any new financial commitment and are only visible to you.
An important aspect to remember is some soft credit checks may happen minus your approval or knowledge. Those that need your approval include employer credit checks.
Common situations that result in soft credit inquiries include:
- Insurance quotes
- Free annual credit reports
- Credit lenders checks before preapproving you
- Credit changes that you did not request
- Employer credit check
What is Hard Credit Inquiries?
Hard credit inquiries are checks made by a lender to check your creditworthiness. The hard credit checks happen when you are about to make a financial commitment.
Hard Credit Inquiries, also known as Hard pulls, affect your credit score.
They happen when you apply for a loan. The lender will want to check your credit history and strength to see the likelihood of you paying back.
Potential lenders will look at the negative and positive parts of the report. A good payback history and strength provide lenders with the confidence to approve your loan.
The checks are visible to anyone who requests your credit report with your permission and authorization.
Hard pulls happen in the following situations:
- When applying for credit cards
- During loan applications(auto loans, mortgages, and personal loans)
- Some utility applications
- Apartment and home rental applications
- credit line increases applications
How do Hard Inquiries Affect your Credit Score?
Hard inquiries do not have a massive impact on your credit score compared to other credit factors. For example, hard inquiries contribute only 10% compared to payment history with 35% and credit utilization with 30%.
According to FICO, a single hard check gives a one to five points drop to your credit score. The drop is also affected by individual financial and credit health.
If you have a good credit history, you may notice no to minimal changes to your score. On the other hand, short credit history and poor payment history will impact your score hugely. It also means beginners with few credit accounts and starting to build credit are affected most.
It should not discourage you from applying for loans. Having inquiries show that you are trying to build credit- just try to space out the hard credit checks.
What do Hard Pulls show a Prospect Lender?
While the impact of hard pulls is minimal to your score, they are a huge part of processing your capability to pay back.
The primary goal for lenders to request your credit report is to check your worthiness. So if they notice many hard inquiries by any chance, it may raise eyebrows.
“But my score is good. So why would checks have an impact?” You may be asking.
Well, many hard inquiries within a short period reflect urgency and desperation. It shows that you are under financial stress and may not be making the right financial decision.
FICO reports that individuals with more than six hard checks in their credit report are eight times more likely to file for bankruptcy than individuals without hard checks.
Although, it is essential to remember that many other credit report items influence the possibility of loan approval.
How Long Do Hard Inquiries Stay on Your Credit Score?
You are probably asking yourself how long an inquiry stays on your report. Hard inquiries will stay on your credit report for two years.
However, hat=rd inquiries will affect your credit score for only a year, emphasizing the hard inquiries within the last six months.
The hard inquiries should not be a problem if you have an excellent credit history.
Can you Dispute a Hard Credit Inquiry?
Yes, you can dispute a hard credit inquiry. However, it doesn’t apply to reported, authorized, and documented inquiries.
According to law, you can dispute any inaccurate and false information on your credit report. Therefore, it is vital to look at your credit report to fish out errors regularly.
Check for any suspicious entry of inquiry you did not authorize and take immediate action. It’s a perfect way to maintain a good score and stop identity theft.
Contact the involved credit bureau and report the error made on your report. Provide all the relevant information regarding the hard pull and wait for the bureau to investigate. Once your dispute is valid, the bureau shall remove it from your record.
The three main credit bureaus offer a way to file disputes.
- How to file a dispute with Equifax
- How to file a dispute with Experian
- How to file a dispute with TransUnion
You can also contact the Consumer Financial Protection Bureau if the issue is not solved.