When applying for a new loan or line of credit, it’s not uncommon to have some concerns about the impact of an inquiry on your credit score. After all, it takes work and discipline to maintain the kind of strong credit profile that provides access to the best rates, terms and offerings, and you’ve likely heard that your score takes a hit when a business or financial institution runs your credit.
Although credit inquiries aren’t likely to cause major damage to your credit report, it can be helpful to understand the ways in which they do factor in to the total equation. We’re dispensing with some of the most popular misconceptions about credit inquiries, so that you can confidently pursue the best deals for you and sidestep credit pitfalls:
You won’t hurt your credit by checking it yourself: When you order a copy of your own credit report for personal review, this is considered a “soft inquiry.” You can do this as often as you want without it affecting your credit score. As Go Clean Credit points out, a person who checks their credit report is viewed as demonstrating responsible credit management. Other types of “soft inquiries” that won’t hurt your score include those made by: businesses that want to extend an unsolicited offer to you (e.g. pre-approved credit cards), companies with which you already have an account, and prospective employers who want to view your credit file as part of a background check (although California law restricts this practice among employers). For a fuller understanding of what’s considered a “soft” versus “hard” credit inquiry, check out “The Difference Between Hard and Soft Credit Inquiries” from U.S. News & World Report.
A “hard inquiry” can lower your score — but not by much: A hard inquiry occurs when a lender or credit issuer receives direct authorization from you to check your credit report for the purpose of making a decision regarding extending you a loan or line of credit. Unlike a soft inquiry, a “hard pull” on your credit profile can lower your credit score, but the impact of one inquiry is minor. Typically, people will notice a drop of fewer than five points, but this depends on individual credit history. Those with a short credit history or few active accounts may experience a greater drop, and those with stellar credit may not see their scores change at all. In general, multiple hard inquiries are seen as an indication that a consumer is taking on more debt, and could present a greater credit risk. According to myFico, studies indicate that people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than those with no inquiries.
It’s only temporary: Although a hard inquiry will remain on a credit report for two years, it will actually only affect a credit score for up to one year. When you consider that FICO scores range from 300-850, a drop of a few points hardly seems like something to fixate on. But as Forbes asserts, in some cases, “five points could cost you thousands of dollars over the life of your mortgage.” However, this needn’t prevent you from shopping around for the best possible rates and terms on a student loan, mortgage, or car loan—if you time your application process strategically as described below.
How to shop around for a mortgage, auto or student loan without accruing multiple hits on your credit report: Lenders recognize that people who are responsible with money often comparison shop for major purchases. Most scoring models are sophisticated enough to account for this. If you complete multiple applications for an auto, home or student loan within a relatively short timeframe, the hard inquiries you make are treated as only one in terms of the impact to your credit score. This way, consumers aren’t penalized for trying to find the best possible deal. While the exact time period depends on the scoring model used, most experts recommend you complete your comparison shopping within a time window of about 30 days. Some older scoring models that are still used today have a 14- day span, but the newest FICO versions cover a period of 45 days.
In the final analysis, credit inquiries constitute only about 10 percent of an overall credit score, a small fraction when you consider more significant components like payment history (30 percent), debt level (30 percent) and length of credit history (15 percent). On the other hand, every new credit inquiry can adversely affect your score by several points, so it’s generally best to do your research on credit cards and loans before you start the application process. And if you’re in the middle of completing the mortgage process, it’s highly advisable to hold off on applying for any new loans or lines of credit until after you’ve closed on your home.