Credit inquiries play a key role in determining your credit score. There are reasons for this. One, they give a peek into your latest credit activity and second, it shows the frequency with which you are seeking new credit.
Essentially, there are two kinds of credit inquiries: hard and soft inquiries.
Here’s how they affect your credit score:
Hard inquiries: These happen when a lender has pulled your credit report after you made an application for credit, such as at the time of applying for a loan or a credit card.
Hard inquiries may have a temporary negative impact on your credit score because they indicate that you are seeking new credit.
But their impact is generally small, and it disappears over a period of time. Hard inquiries may stay on your credit report for as long as two years but affect your credit score only for the first year.
Soft inquiries: These take place when you or a third party happens to check your credit report for a number of reasons other than applying for credit. For instance, soft inquiries can result from checking your own credit report, pre-approved credit offers, or background checks by potential employers or landlords.
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It is vital to note that soft inquiries do not affect your score since they don’t show a potential increase in your debt burden. They also stay on your credit report but are only visible to you and not to lenders who are reviewing your credit history for taking a loan decisions.
Credit scoring models factor into both the number and frequency of hard inquiries at the time of computing your credit score.
While a few hard inquiries within a short period of time may have a small impact on your score, a large number of inquiries within a short time frame may even raise red flags to lenders and thus, affect your creditworthiness adversely.
It’s vital to be mindful of how often you seek credit, particularly if you’re planning major financial transactions such as applying for a house or car loan.
Restricting the number of hard inquiries and spacing out credit applications can help minimise any negative impact on your credit score.
Frequently Asked Questions:
Does checking your credit report impact your credit score?
It does not impact your credit score. As a matter of fact, it is advisable to keep checking the score from time to time.
What is known as a soft inquiry?
It includes checking your own credit score. This does not affect your credit score in any meaningful way.
What is a hard inquiry?
When a lender checks your report while making its decision to give loan, it is known as a hard inquiry.
Does a hard inquiry impact the credit score?
It does but only in a small way. So, there could be a radical difference only when you have a number of loan applications open.
Should you often check your credit score over a period of time?
Yes, it’s recommended to keep track of credit score on a regular basis to stay informed about your creditworthiness.
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Published: 17 Mar 2024, 10:43 AM IST