Your credit score is a crucial factor that lenders and creditors use to determine your creditworthiness and decide whether to approve your credit applications or not. It’s a three-digit number that ranges from 300 to 850, with higher scores indicating better creditworthiness. One of the factors that can affect your credit score is credit inquiries. A credit inquiry occurs when a creditor or lender accesses your credit report to evaluate your creditworthiness. There are two types of credit inquiries: hard inquiries and soft inquiries. Hard inquiries can have a negative impact on your credit score, while soft inquiries do not. In this context, it’s important to understand the difference between the two types of inquiries and how they can affect your credit score.
How credit inquiries can impact your credit score
1. Each hard inquiry can lower your credit score by a few points.
When a lender or creditor checks your credit report, it can signal that you’re applying for credit, which may indicate financial instability or increased credit risk. Each hard inquiry can lower your credit score by a few points. However, the impact on your score is typically small, and the effect usually lasts for a short time.
2. Multiple inquiries within a short time period can compound the impact.
If you apply for several credit products in a short time period, such as a few weeks, each inquiry can have a compounding effect on your credit score. Lenders may interpret multiple inquiries as a sign of financial distress or a higher likelihood of default. This can lead to a more significant drop in your credit score.
However, it’s worth noting that credit bureaus typically group inquiries made within a short time period as one inquiry. For example, if you’re shopping for a mortgage and have multiple inquiries within a 45-day window, the credit bureaus will typically count those inquiries as a single inquiry.
3. Soft inquiries do not impact your credit score.
Soft inquiries, also known as “soft pulls,” occur when you or a lender checks your credit report for reasons other than credit approval, such as a pre-approved credit offer or a background check. Soft inquiries do not affect your credit score in any way.
4. The impact of inquiries decreases over time.
The impact of hard inquiries on your credit score decreases over time. After a year, most inquiries will no longer impact your credit score. After two years, they will no longer appear on your credit report.
5. Inquiries are just one factor that affects your credit score.
Inquiries are just one of the factors that affect your credit score. Other factors, such as payment history, credit utilization, length of credit history, and types of credit, also play a significant role in determining your credit score.
In summary, credit inquiries can have an impact on your credit score, with hard inquiries having a more significant effect than soft inquiries. Hard inquiries can lower your score by a few points, but the impact is usually temporary and fades over time. However, multiple hard inquiries within a short period can signal to lenders that you’re actively seeking credit, which could be interpreted as a sign of financial distress and lead to further credit denials. Therefore, it’s crucial to be mindful of the number of hard inquiries on your credit report and avoid applying for credit unnecessarily. On the other hand, soft inquiries do not affect your credit score, so you can check your credit report or receive pre-approved credit offers without worrying about negative consequences.