Every time you sign an application for a new credit card or loan, you give the lender or card issuer permission to check your credit report. Each time someone checks your credit with your permission, a hard inquiry or hard pull is registered on your credit history.
Hard inquiries affect your credit. The impact is usually small, but if you have a limited credit history or if you register several hard inquiries in a short time it may be more significant. Understanding how hard inquiries affect your credit and managing those inquiries effectively can help you get the credit you need without excessive damage to your credit.
What Are Hard and Soft Inquiries?
The Fair Credit Reporting Act limits access to your credit report and gives you the right to know who has requested access. Your credit report includes a list of everyone who has requested access to your file in the last year. Each request is an inquiry. There are two kinds of inquiries: hard and soft.
Soft inquiries do not require your permission and do not involve an application for new credit. Soft inquiries can occur for a number of reasons:
- You Request Your Own Credit Report
- Pre-Qualified Credit Card Offers
- Pre-Qualified Insurance Offers
- Background Checks (Usually for Employment)
Soft inquiries are noted on your credit report but only you can see them. They do not affect your credit health or history.
Hard inquiries occur when someone requests access to your credit report to judge your creditworthiness before extending credit or entering into a business transaction.
Hard inquiries require your permission. In many cases, signing an application gives the potential creditor permission to check your credit. Review any document carefully before signing to see if it authorizes a credit check.
Hard inquiries may be generated by these transactions, among others:
- Credit Card Applications
- Loan Applications
- Rental Applications
- Phone or Utility Account Applications
- Car Rentals
Hard inquiries can be seen by anyone who is authorized to request your credit report and they do have an impact on your credit.
If you receive a pre-qualified credit card offer in the mail, the company has already made a soft inquiry on your credit report. If you don’t apply for the card there will be no impact on your credit. If you do apply, a hard inquiry will be registered, and your credit could be affected.
How Do Hard Inquiries Affect My Credit?
Credit reporting companies track the behavior of borrowers and look for links between actions and credit risk. They have learned that people who apply for new credit have a higher probability of defaulting on loans. Looking for new credit can be a sign that you need access to funds.
Both VantageScore and FICO, the two primary providers of credit scores, state that the impact of a single hard inquiry is usually minor. It may not affect your credit at all. There are, however, some conditions in which hard inquiries may have a greater impact on your credit:
- Multiple inquiries. A cluster of hard inquiries on your credit report may indicate that you are desperately looking for additional credit which could be a sign of financial stress. If several hard inquiries are registered on your credit report in a short time, there may be a significant impact on your credit.
- A thin credit file. If you have a short credit history with a small number of accounts listed, you are said to have a thin credit file. There’s a limited amount of information on your record. The more information is in your credit record, the smaller the impact of any single change will be. In a thin file the impact of a small change is exaggerated because each change makes up a greater percentage of your score. Be extra careful about hard inquiries if you have a thin credit file.
Hard inquiries remain on your credit report for two years, but they generally have no impact on your credit after the first year.
How to Reduce the Impact of Hard Inquiries
You can minimize the impact of hard inquiries on your credit by keeping track of inquiries and managing them effectively. These steps can help:
- Track your inquiries. Keep a record of the hard inquiries you’ve generated and when they were made.
- Remember that loan and credit card applications aren’t the only source of hard inquiries. Applying for an apartment, applying for a postpaid phone plan, or renting a car without a credit card can generate a hard inquiry on your credit report.
- If you’re not sure if a transaction will generate a hard inquiry, ask. Always read applications carefully. Your signature may authorize a hard inquiry.
- Only apply for new credit when you need it. A wallet full of credit cards may feel good, but a credit card shopping spree can hurt your credit.
- Only apply for credit if you believe you will be approved. A hard inquiry will appear on your report whether your application is approved or rejected. Most lenders and credit card issuers publish their application criteria. Review their standards and only apply if you are sure you meet them.
- Try not to register more than one hard inquiry in a six-month period. If you plan to apply for credit from multiple sources, spread the applications out.
- If you’re loan shopping, group your inquiries within 2 weeks. Credit reporting companies recognize a cluster of similar inquiries as loan shopping and register only a single hard inquiry.
- Avoid hard inquiries if you plan to apply for a major loan soon. The impact of a hard inquiry may be small, but even a small difference in your credit can affect the terms you will get on a mortgage or car loan.
- Check your credit reports regularly and keep aware of their contents. Remember that each entry will have a greater impact if your credit history is limited. Watch out for inquiries that you don’t recognize. Contact the company and make sure the request came from you.
- If a hard inquiry that you didn’t request appears on your credit report, you can dispute the record, and have it removed. You may also wish to take steps to secure your accounts: an unrecognized inquiry could be a sign of identity theft.
Hard inquiries usually don’t have a large impact on your credit, but every bit counts. Staying aware of your hard inquiries and managing them carefully can help you take charge of your credit.
Conclusion
Hard inquiries can affect your credit, especially if you have a thin credit file or you have registered other hard inquiries recently. That’s not a reason to avoid applying for credit that you need for good reasons. The impact of hard inquiries is usually minor and temporary, and you can reduce it further by monitoring and managing the hard inquiries on your credit report.
