The Impact of Credit Inquiries on Your Credit Score

A credit score serves as an indicator of your financial trustworthiness and plays a crucial role in your ability to secure loans or credit. Various factors contribute to your credit score, including your payment history, credit utilization, length of credit history, and credit mix.

Among these, one less understood but essential aspect is the role of credit inquiries. This article aims to shed light on the impact of credit inquiries on your credit score and ways to manage it.

Understanding Credit Inquiries

A credit inquiry, also known as a credit check, occurs when a lender, credit card issuer, or another entity checks your credit report. This usually happens when you apply for new credit. There are two types of credit inquiries – hard inquiries and soft inquiries.

1. Hard Inquiries:

Hard inquiries occur when a financial institution, such as a lender or credit card issuer, checks your credit when making a lending decision. This can happen when you apply for a mortgage, car loan, or credit card. Hard inquiries can slightly lower your credit score and typically stay on your credit report for two years.

2. Soft Inquiries:

Soft inquiries occur when you check your own credit or when a lender or credit card issuer checks your credit to preapprove you for a loan or credit card. They can also happen when an employer checks your credit. Soft inquiries do not affect your credit score and are not visible to potential lenders. They may or may not be recorded in your credit report, depending on the credit bureau.

Impact of Credit Inquiries on Your Credit Score

Credit inquiries account for around 10% of your total FICO Score. While they don’t hold as much weight as factors like payment history or credit utilization, they can still significantly impact your credit health.

1. Impact of Hard Inquiries:

Each hard inquiry can shave off a few points from your credit score. However, the impact typically decreases over time, and inquiries are removed from your report after two years.

Multiple hard inquiries in a short period can suggest to lenders that you are a higher-risk borrower, perhaps indicating financial distress or poor debt management. However, many scoring models account for the fact that consumers often shop around for the best loans and rate shop, especially for mortgages, auto loans, and student loans.

Therefore, multiple inquiries for the same type of loan within a short timeframe (usually 14 to 45 days, depending on the scoring model) are generally treated as a single inquiry.

2. Impact of Soft Inquiries:

Soft inquiries have no impact on your credit score. You can check your own credit report as often as you like without any negative effects. Likewise, lenders’ checks for pre-approval purposes won’t impact your score.

Managing Credit Inquiries

Despite their potential impact, it’s crucial to remember that credit inquiries are a necessary part of acquiring credit. Nevertheless, there are ways to manage them:

1. Apply for Credit Sparingly:

Each application for credit can lead to a hard inquiry. Apply for new credit accounts only when necessary to minimize the number of hard inquiries.

2. Rate Shopping:

When shopping for rates on a particular loan, try to do it within a short period, usually within 14 to 45 days. This way, most scoring models will count all the inquiries as one.

3. Regularly Check Your Credit Report:

Keep track of the hard inquiries on your credit report to ensure they are accurate. If you find any inquiry you didn’t authorize, you can dispute it with the credit bureau.

4. Ask for Pre-approval:

Many lenders can estimate your likelihood of approval based on a soft inquiry, which doesn’t impact your credit score. This allows you to compare different loan options without damaging your credit health.

In conclusion, while credit inquiries may impact your credit score, their effect is relatively small and temporary compared to other factors. It’s important not to let the fear of credit inquiries discourage you from seeking credit.

With a thoughtful approach and careful management, you can minimize the impact of hard inquiries and make wise decisions to maintain and improve your credit health.