Credit inquiries leave indelible footprints on your financial journey. Every time somebody, whether it’s a lender creditor or a potential employer, checks on your credit report, an inquiry is recorded.
In this chapter, we will look at credit inquiries, distinguishing between hard and soft inquiries to uncover how they affect your credit score. We will also explore the different strategies to manage them wisely.
What are Credit Inquiries?
Credit inquiries are essentially requests for access to your credit report and/or credit score. They occur when you apply for a loan, a credit card, or even to rent an apartment. They may or may not affect your credit report depending on the type of inquiry conducted.
Soft Inquiries: These are inquiries that don’t impact your credit score. They usually occur when you or a company checks your credit report for informational purposes. For example, when you check your credit report, it’s considered a soft inquiry. Similarly, if a company checks your credit to see if you qualify for pre-approval offers, that’s also considered a soft inquiry.
Hard Inquiries: Hard inquiries, on the other hand, can negatively affect your credit score. They happen when you apply for new credit. Lenders typically request your credit report as part of their decision-making process. A collection agency requesting to see your report for skip-tracing purposes is also reported as a hard inquiry.
This type of inquiry is also conducted by utility companies, auto insurers, and even potential landlords for various purposes like setting premiums or determining the need for a security deposit.
Too many hard inquiries within a short period can indicate that you’re seeking a lot of new credit. This can be viewed as risky behavior.
How They Impact Your Credit Score
Hard inquiries can pull down your credit score, but the effect is usually modest and temporary. Each hard inquiry might cause your score to drop a few points. The good thing is that the decrease is usually minor and it should bounce back relatively quickly, especially if you have a strong credit history.
The impact of these depends on various factors, including your overall credit profile, the number of inquiries, and the types of credit you’re applying for. For instance, some credit bureaus count multiple inquiries for a mortgage or auto loan within a short time frame as a single inquiry. Credit bureaus could recognize this surge to mean that you’re rate shopping.
Note that some lenders may also view an excessive number of hard inquiries as a red flag. Based on statistics, a person having six or more recent hard inquiries is eight times as likely to file for bankruptcy compared to those with fewer inquiries.
Managing and Minimizing Credit Inquiries
While some inquiries are inevitable, it’s essential to be mindful of their potential effect on your credit score. Here are some tips to manage and minimize their effects:
- Rate Shop Wisely: Multiple inquiries within a specific window for the same type of loan are usually treated as a single inquiry. The credit bureaus recognize that you’re likely shopping for the best mortgage or auto loan if the inquiries fall within a 14-45 day window. That’s why it is best to do your research and compare rates even before applying.
- Spread your Applications: Avoid applying for multiple types of credit all at once. Spread out your credit applications over time. Experts generally recommend only applying for one credit card every six months.
- Know the Type of Inquiry: Before applying for credit, inquire whether the lender will make a soft or hard inquiry.
- Check Your Report: Regularly review your credit report. Check for any unauthorized or incorrect inquiries. Ask for clarification and dispute any inquiry you don’t recognize.
- Focus on Overall Credit Habits: Remember that inquiries are just one aspect of your credit profile. Paying on time and exercising responsible credit behavior is still more important when it comes to your credit health.
Understanding the nature of credit inquiries helps you to make better decisions when applying for new credit. By being strategic in your applications and monitoring your credit report, you can minimize the negative impact of these on your credit score.
In the next chapter, we’ll look into the process of credit repair itself. We will learn more about identifying errors in your credit report. Additionally, we will cover the process of disputing incorrect information and taking steps to improve your credit health.
Next: Chapter 5: The Credit Repair Process, where we’ll dive into the steps you can take to fix inaccuracies and improve your credit profile. By understanding the credit repair process, you’ll be able to take better control of your financial future.