If you’ve ever heard that credit applications “ding” your credit score, then you understand that the very act of applying for a loan or credit card can hurt your credit.
But how much does it hurt? How long do these “dings” stay on your credit report? And what’s the difference between hard credit inquiries and soft inquiries, when it comes to your credit score?
All are questions worth asking, because your credit score matters. It determines whether you get approved for the best apartments and rental homes, whether you need a $50,000 down payment or a $10,000 down payment, the interest rate and therefore the monthly payment you have to make for a house or car. The differences in interest rates you qualify for can amount to hundreds of dollars each month for the same loan amount.
As you wade deeper into the world of loans and credit, take the time to understand how different types of credit inquiries affect your score. Then take steps to minimize the damage and maximize your credit score.
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Hard Credit Inquiries
When people talk about inquiries dinging your score, they mean hard inquiries, sometimes referred to as hard credit pulls.
Lenders pull your credit report as a hard inquiry when you apply for a loan, line of credit, or credit card. Hard credit pulls are part of the underwriting process, used by the lender to determine whether or not to extend you the credit for which you’ve applied.
For example, when you first talk to a loan officer about a mortgage, they may offer you an informal, preliminary quote for today’s interest rates, based on a verbal discussion of your credit history. They ask you your approximate score, then offer an outline of the pricing you can expect.
If you then submit a complete loan application for a mortgage, it includes an authorization to pull your credit report. The lender then pulls your credit report as a hard inquiry to evaluate and (hopefully) approve your mortgage application.
How Hard Inquiries Affect Your Credit
Each hard credit pull can shave a few points off your credit score. For FICO scores, “a few” means up to five, while it could be up to 10 points for your VantageScore.
These dings are temporary, remaining on your credit report for around two years. But they don’t drag down your score for those full two years — the impact on your score diminishes over time, and stops hurting your score at all within one year.
The credit bureaus also provide some leniency to account for shopping around for the best loan terms. If you apply with several lenders in rapid succession for the same loan type — such as an auto loan or mortgage — the credit bureaus typically lump those credit pulls together into a single hard inquiry. Which makes sense: you don’t actually need five different auto loans at once — you need one, and are clearly trying to find the best deal. Older FICO scoring models allow a 14-day window for these similar credit pulls, while newer scoring models like FICO 10 allow a more generous 45-day window.
The credit bureaus also give you a 30-day window before new hard inquiries impact your credit score, to let you finalize your loan before penalizing your score.
Why Hard Inquiries Ding Your Score
The old gripe goes that lenders only want to lend money to people who don’t need it. It contains more than a kernel of truth.
Lenders price and approve — or decline — loans based on risk. The greater your wealth, the higher and more stable your income, and the better your history of paying bills in full and on time, the lower the risk of you defaulting on a loan.
In contrast, people who look — and may be — desperate for money make for high-risk borrowers. Lenders don’t want to touch them, because people who are desperate are inherently financially unstable.
And nothing screams financial desperation like applying for credit all over town.
A person who applies for three personal loans, six credit cards, a home equity line of credit, and a cash-out refinance all in the same week looks like a drowning person flailing for a line. Which is precisely why the credit bureaus take credit applications into account when calculating your score.
Soft Credit Inquiries
Unlike hard inquiries, soft inquiries don’t hurt your credit score.
They may or may not appear on your credit report, depending on the credit bureau. But even if they do, it doesn’t impact your score in the slightest.
Whereas creditors use hard inquiries to underwrite an existing application, they use soft inquiries for other purposes. One such use is to prequalify borrowers before they apply, as part of a marketing funnel rather than underwriting your application. For example, when you enter your personal information as a first step to see what kind of credit card offer you qualify for, that constitutes a soft credit pull.
Self-initiated credit pulls also make soft inquiries, such as when you pull your annual free credit report.
When employers pull your credit as part of the hiring process, those remain soft inquiries as well. In fact, any credit pull as part of a broader background check should be a soft inquiry.
Soft credit inquiries don’t necessarily require your explicit permission. Hard credit inquiries do require it, as part of an application for credit.
How to Minimize Hard Credit Pulls
First and foremost, only apply for credit that you need or that makes sense strategically.
Instead of opening an in-store credit card at 15 stores, open one or two cash-back credit cards or travel reward cards with high limits and low interest rates. Instead of taking out personal loans to pay for home improvement projects, save up the cash.
When it comes time to shop around for a mortgage or auto loan, comparison shop all at once rather than spreading it out over several months. Better yet, pull your own credit report and collect verbal quotes, and only authorize your final choice of lender to hard pull your credit.
In fact, you should pull your own credit report to review for errors at least once each year. Beyond looking for accounts that don’t belong to you, look at the credit inquiries listed. Did you actually apply to all those creditors? If not, you may be the victim of identity theft, as someone else opens credit accounts under your name — then racks up as much debt as they can. You can dispute these inquiries with the credit bureaus to remove them, a process that proves both free and surprisingly easy.
Finally, always ask whether a credit pull is hard or soft if you don’t know. For instance, some landlords and property managers use soft credit inquiry methods to check credit, while others use hard credit pulls. The same goes for utility providers and cellphone plan providers.
How Hard Inquiries Fit into the Bigger Picture of Your Credit
Before you lie awake at night worrying about hard inquiries hurting your credit score, bear in mind that they actually have the least impact on your score of any scoring factor.
The most important factor in calculating your score is your payment history. If you don’t pay every single bill on time, every single month, expect your score to collapse.
Second to your payment history is your credit utilization: the percentage of available credit that you owe. Say your credit card has a $10,000 limit, and you keep a balance of $5,000. That 50% credit utilization ratio hurts your credit score — credit bureaus like to see a ratio of no more than 30%. Ideally, you want to pay your credit cards off in full each month, and avoid the interest.
The third greatest factor impacting your credit score is the average age of your credit accounts. The older the better, to demonstrate a long, stable history of responsible credit use.
Fourth comes the mix of credit account types. The bureaus like to see multiple types of credit accounts among your credit history, which establishes that you can handle different types of credit without abusing any of them.
The smallest impact on your score comes from inquiries. So as you look to improve your credit score, focus first on making sure you pay all bills on time, and paying down any high balances.
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If you behave responsibly when it comes to your personal finances and debts, you have little to fear from hard credit inquiries.
Shopping around for mortgage, auto, or student loans won’t sink your credit. Falling for every in-store credit card offer that retailers throw your way, or running around town desperately applying to every credit offer you can find, will ding your credit, however.
Soft inquiries don’t hurt your credit at all, and hard inquiries hurt it only slightly and temporarily, if at all. Avoid heavy debts, pay your bills on time, open credit accounts with discretion, and hard inquiries will pose little threat to your credit.
What worries you about hard credit inquiries? Have you ever seen your score drop due to too many inquiries?