Hard vs. Soft Inquiries
If you’ve ever checked your credit report, you’ve noticed the section about inquiries. This part of your report plays into about 10% of your FICO credit score, so it certainly isn’t insignificant.
So, what are credit inquiries, are there different types, and how do they affect your creditworthiness?
An inquiry is a notation that’s placed on your credit report anytime a lender, well, inquires about your credit history. This means that the next time you apply for a new cash back rewards credit card, request approval for home loan, or even try to rent an apartment, you’ll have someone inquiring about your credit.
Depending on who is inquiring about your credit history – or “pulling your credit” – you may or may not see a record on your credit report, though. So, why are some inquiries reported and others never show?
When you see a notation showing up on the Inquiries section of your credit report, it’s because a lender performed what is called a hard pull on your credit. These are the ones that matter.
A hard pull is performed when a lender wants to get a complete picture of your credit history. These are most often encountered when you are applying for a new account, especially one where you’ll have a line of credit. This inquiry not only lets a lender see your credit history in order to make a determination of creditworthiness, but it also lets the credit bureaus know that you’re actively seeking some form of credit.
You will almost always see a hard inquiry show up when you apply for a new credit card, shop around for a new mortgage, or solicit interest rates for loans.
A soft pull, however, is a much more mild notation. This type of credit check is what happens when your report is involuntarily checked – such as when a credit card company wants to send you a preapproved solicitation. When you check your own credit, that also falls under the realm of a soft pull, as does the type of check that is often conducted by existing lenders before extending additional credit to you. However, be careful! I have personally had what I thought was a soft inquiry actually turn out to be a hard pull.
I requested that a decade-old line of credit be extended, as I wanted to use a particular rewards card for a big purchase. The company put me on hold in order to check whether or not I was approved, for which I gave permission. When I went to check my credit report the following month, though, I noticed a brand spanking new hard inquiry on my report and a 4-point drop in my FICO.
Why? Because instead of doing a soft pull, like most credit card companies would, they did a hard pull. While I still got the increased line of credit, I now have 16 months left before that inquiry falls off of my report.
Bottom line: be sure to ask whether a company’s pull will be a hard or soft inquiry before giving your approval. This may or may not change your mind about them running your credit.
Since a hard pull is the one you’ll actually see reported on your credit, it’s important to know the actual impact it will have on your score.
First off, you should know that hard inquiries will remain on your credit report for two years. No, this isn’t nearly as long as your payment history or negative reports, which stay around for seven years, or bankruptcies, which stick around for 10 years. However, for a simple inquiry – which may or may not even result in opening a new account – two years is nothing to scoff at.
Secondly, you need to know what percentage of your credit score is composed of inquiries.
Scoring models vary greatly – in fact, there are 49 different FICO scores alone. However, it’s safe to say that the category of “new credit” makes up somewhere around ten percent of your overall score. Depending on how strong your credit score already is, this could mean that a new inquiry barely makes a dent or could sink your score by as many as 12 points. This ten percent includes things like credit inquiries, as it shows potential lenders how active you’ve been in seeking out, and obtaining, new lines of credit. If you’ve been on a card-opening spree as of late, it can make them question your financial situation. After all, why would someone need to open five new credit cards this month (or worse, why would someone apply for so many credit cards only to get denied for all of them)?
Having a large number of inquiries in a short period of time can make it appear that you’re in dire straits. Perhaps you’re just trying your hand at travel hacking or have been enjoying those sign-up bonuses, but to a lender, it appears as though perhaps you’re desperately seeking credit in order to keep your head above water.
Hard pulls are often necessary, but be sure to limit them whenever you can in order to reduce their impact.
Applying for credit is a necessary evil for many of us, especially when it comes to things like buying a home. More than that, though, is the requirement to shop around at multiple lenders until we find the one that suits our needs (and our desired interest rate) best. Luckily, companies like FICO recognize this.
Both FICO and VantageScore models allow for individuals to shop multiple lenders in a defined timeframe without detriment to their score. This means that you can apply for a mortgage with four or five lenders until you find the right fit, without having your credit report pinged with multiple hard pulls in such a short period of time.
With older FICO models, all related inquiries (such as those for a new mortgage) that are made within a 14-day period are grouped together and considered one “inquiry.” This allows you to spend two weeks rate shopping without damaging your score.
Newer models are even more generous, allowing 45 days to rate shop. Unfortunately, you never really know which scoring model a future lender will use to pull your credit, but it’s good to know that if you group your rate shopping in a short period of time, the impact is dramatically reduced. If you ever want a new credit card, a home mortgage, or even a financed vehicle, you’ll likely need to accept the reality of a credit inquiry.
Both soft and hard pulls are necessary in the lending world, and they aren’t as horrible as they may seem. The key is to limit the hard inquiries where you can.
Before allowing any company to check your credit for things like a raised limit or a new utilities account, ask whether the pull is hard or soft. This may or may not impact whether you move forward, depending on your current credit score. If you do need to move forward with a hard pull, just be sure to make them as few and far between as they can.
If you’re shopping for something like a new home mortgage and requesting rates from multiple lenders, do all of your work in a short time period. Depending on the scoring model, anywhere from 14 to 45 days will be considered one “rate shop,” and minimally impacts your credit.
If you have more inquiries than you’d like on your credit right now, rest easy. They only count for a small percentage of your score and, worst-case scenario, they’re gone in only two years.