When it comes to managing your credit, understanding the concept of credit inquiries is essential. Every time someone checks your credit report, it is recorded as an inquiry. But not all inquiries are created equal! Some have little effect on your credit score, while others might impact your credit to a great extent. Knowing the difference between soft inquiries and hard inquiries can help you make smarter financial decisions and maintain a healthy credit profile!
What is a Soft Inquiry?
A soft inquiry occurs when a credit check is performed, but it may not be linked to a formal application for new credit. These inquiries are informational, need your authorization and may not impact your credit score.
- Little Impact on Credit Score: Soft inquiries may be less harmful than hard inquiries. This may not always be the case.
- For Monitoring Purposes: They are often used for non-lending purposes, such as checking and monitoring your own credit report.
Examples of Soft Inquiries:
- Checking your own credit score or report.
- Pre-qualifying for a loan or credit card.
- Background checks by employers.
What is a Hard Inquiry?
A hard inquiry happens when a lender or other entity pulls your credit report as part of a formal application for new credit. These inquiries indicate that you’re seeking financing, which can influence your credit score. Hard inquiries are a normal part of applying for credit, but managing them wisely is important to avoid unnecessary impacts on your credit score. Hard Inquiries:
- May Lower Your Credit Score: Hard inquiries may cause a dip in your credit score, typically by a few points but could decrease your credit more dramatically.
- Used to Assess Creditworthiness: Lenders rely on hard inquiries to evaluate your ability to manage new credit responsibly.
Examples of Hard Inquiries:
- Applying for a mortgage or car loan.
- Requesting a credit card or personal loan.
- Asking for a credit limit increase.
Why Do Hard Inquires Impact Credit Scores?
Hard inquiries can affect your credit score because they signal to lenders that you’re seeking new credit. While a few inquiries over time are normal, multiple hard inquiries in a short period might indicate financial instability or an attempt to accumulate debt, which could make lenders hesitant to extend more credit.
The good news is that some types of credit applications, like mortgages or auto loans, may allow for rate shopping without significant credit score impact. If multiple inquiries for the same type of loan occur within a specific time frame, they may be counted as a single inquiry. Note: Some lenders may require additional hard pulls that could affect your score. Always consult your Loan Team to understand how rate shopping may impact your credit during your specific loan process.
Credit inquiries are a normal part of financial life, but understanding their impact is crucial for maintaining a healthy credit score. A few hard inquiries spread out over time are unlikely to cause significant harm, but too many in a short period may raise red flags for lenders and could impact your credit score. By keeping track of your inquiries and being strategic about when and why you apply for credit, you can protect your score and stay on track toward your financial goals!
