When applying for a loan or line of credit, your lender will need to access your credit history and credit score from one or more credit reporting bureaus (e.g., Experian, Equifax, and Transunion). These credit bureaus are responsible for tracking your borrowing, payment activity, and calculating your credit score.
A credit inquiry is a formal request to access your credit report. These inquiries are also tracked and reported by credit bureaus. Inquiries into your credit history can remain on your credit report for up to two years. However, keep in mind that not all credit inquiries will negatively impact credit score.
Soft Credit Inquiries
Soft credit inquiries are not directly related to an application for credit. These include:
- Checking and monitoring your own credit
- Credit checks conducted by potential employers
- Checks conducted by existing creditors as part of their routine account maintenance
These types of soft credit inquiries will have no impact on your credit score.
Hard Credit Inquiries
Hard credit inquiries are directly related to an application for credit. These include:
- Applying for a new credit card
- Requesting financing for a new car
- Applying for a mortgage
Hard credit inquiries often indicate that an individual may be planning to increase their amount of debt. For lenders, individuals with higher amounts of debt are of greater risk and may find it harder to pay off existing/future debt.
For this reason, inquiries that increase a borrower’s risk are considered hard credit inquiries and will have a negative impact on your credit score.
Impact of Hard Credit Inquiries on Your Credit Score
For the average consumer, a single hard credit inquiry will have a minimal impact on their credit score. In fact, these inquiries will usually have a negative impact of less than five points on your overall credit score. You can expect a higher point deduction if you are a borrower that has a short credit history.
Additionally, when it comes to applying for a mortgage, credit bureaus understand that shopping with multiple lenders is not equivalent to requesting multiple loans. Therefore, most credit scoring models allow for hard credit inquiries of the same type to be made within a short time frame and only count against your overall credit score as a single inquiry.
Nevertheless, it’s always best to be cautious with hard credit inquiries. In the months prior to applying for a mortgage, you should refrain from applying for any credit you do not need. A difference of a few points on your credit score can result in a higher interest rate with limited loan options.