When someone requests to pull your credit report, it will usually affect your credit score. Having too many inquiries of a particular type can actually have a negative effect. But the key to understanding which types of inquiries will hurt your credit score is knowing the difference between “hard” and “soft” inquiries.
When you apply for a new loan or a new line of credit (credit cards, car loan, etc.), you must first give the lender or credit card issuer permission to look at your credit report which is known as an inquiry or a “hard pull.” These inquiries are recorded on your credit report, since your desire to borrow money is considered to be an indication of your creditworthiness.
There is another type of inquiry that has nothing to do with your application for a new credit cards or a new line of credit, called a soft inquiry, or “soft pull.” In fact, companies may not even need your permission to perform these types of inquiries, which are generally done for marketing purposes. Examples of soft inquiries include those made by credit card issuers who mail firm offers of credit to qualified customers, the scores pulled monthly or quarterly by lenders on their own customers for the purpose of account review and employers who choose to do background checks. In addition, when you check your own credit report, you are only performing a soft inquiry.
The most important difference
When it comes to the effect of these inquiries on your credit report and credit score, it’s important to realize that only hard inquiries can make a difference, not soft ones. The appearance of numerous hard inquiries within a short period of time is seen as an indication that you are looking to borrow money from multiple sources, which is considered to be a sign of increased financial risk. Or to put it another way, you would also probably feel uncomfortable loaning money to someone that you know has been asking many others for a loan. However, no matter how many soft inquiries are generated by banks, employers, or even yourself, your credit score should not suffer.
How much do hard inquiries affect your credit score?
In some scoring methods, it usually affects your score by 10 percent. If you have a high score to begin with, this can be considered minor. If your score is low, the affect could mean the difference having a qualifying score and not having a qualifying score. In contrast, your payment history and your amounts owed are likely much larger considerations—30 percent or more. If you are applying for a home loan, rule of thumb is to limit the amount of hard pulls to protect your score. The higher your score and creditworthiness, the lower the cost of the loan. Minimize your risk!
A 45-day grace period
There are some times when making multiple applications for a loan is not considered to be a sign of risk. When consumers shop around for a home mortgage or a student or automobile loan, they may generate many hard inquiries, but only because they are being smart consumers and looking for the best possible rates. Thankfully, the credit scoring formulas take this rate shopping behavior into account by not penalizing you for repeated inquiries for certain types of loans. For example, often hard inquiries within a 14- to 45-day “shopping” period for a mortgage, an auto loan or a other type of loan are considered a single inquiry. Be prepared, however, to explain the reason for so many inquiries within that 14 to 45 day period. Your lender will want a written explanation for their file.
By knowing the difference between hard and soft inquiries, you can make the right decision when someone asks for your permission to check your credit.
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