Understanding Hard Inquiries on Your Credit Report
- June 24, 2021
- 6 min read
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Whether you’re starting a new business venture, aiming to build your credit score, or simply looking to purchase a new pair of flashy (but totally necessary) shoes for yourself, chances are you’ll apply for a credit card at some point sooner than later. When the time comes, there are lots of things to take into consideration.
Among these are hard credit inquiries. It’s important to understand what hard inquiries are and how they work since they will not only affect your credit score but are often required by credit lenders.
In this article, we are going to cover all the basics of hard inquiries on your credit report so that you can confidently apply for that perfect credit card today.
Essentially, a hard inquiry is when a lender requests a full credit report as a part of your credit or loan application process. These inquiries help credit lenders determine the risk you pose as a borrower. It’s important to note that all hard inquiries impact your credit score.
Unfortunately, while they are unavoidable, hard inquiries take a hit on your credit score. A single hard inquiry can knock your FICO score (one of the most common credit models) down by 5 points. Luckily, hard inquiries do not remain indefinitely on your credit report. Instead, they are removed after two years and stop affecting your score after just one year.
If you are in the market for a new home or perhaps applying for several different loans while shopping for motor vehicles, you may be concerned about all these applications tanking your credit score. However, many lenders consider this, referring to it as rate shopping.
While applying for multiple lines of credit poses you as a high risk, rate shopping simply shows that you are applying to compare and contrast different rates. The window in which multiple applications will qualify as “rate shopping” varies between different credit models.
For instance, FICO scores have a 45-day window, while Vantage Score’s window is only 14 days. If possible, grouping all of your applications in a two-week or less period will help prevent your credit score from taking a hit.
However, while rate shopping can protect your credit while applying for student, home, and car loans, it is not applicable to credit card applications. In the case of credit cards, it is smart to spread applications apart by six months to avoid being labeled as “high risk.” In any situation, only shopping for one line of credit or loan at a time will help you maintain a strong credit score and show lenders that you are a responsible borrower.
As stated above, hard inquiries are a necessary evil when applying for loans and credit cards. However, not all credit checks have an effect on your credit card. Knowing what sorts of applications cause hard inquiries will help you maintain a better record of your finances and help you make smart choices when applying for lines of credit. Some common forms of credit checks that are considered hard inquiries are for:
- Personal Loans
- Student Loans
- Credit Card Applications
- Credit Limit Increase
- Lines of Credit
- Apartment Rental Applications
- Auto Loans
On a side note, you may be treated differently by lenders when applying to lease a car versus applying to buy it outright. Leasing suggests that you intend to have the car for a shorter period of time, which can lead lenders to scrutinize your payment history and credit age more heavily.
In general, anything you can do to show lenders that you are a trustworthy borrower is worth considering.
While hard inquiries do impact your credit score, they are only one piece among a number of factors that help determine your total score. All of the major credit bureaus, such as Experian, Transunion, and Equifax, all use similar criteria to establish credit scores. The four other major factors in addition to hard inquiries that are used to determine your score are:
Having a solid payment history is the most important part of maintaining a strong credit score. Payment history accounts for 35% of your score and is determined by the number of times you have or have not made a payment on time. Other information that will be considered as a part of your payment history are foreclosures, bankruptcies, and wage attachments.
Lenders check how much individuals are spending on their available credit, or “credit limit.” It’s important that borrowers are using credit responsibly, and borrowers with credit lines that are maxed out or close to their limit may see their credit score negatively affected. Credit utilization makes up 30% of your score.
In general, the longer borrowers have had lines of credit open, the more trustworthy they are considered by lenders. Having a longer credit history gives lenders more of an opportunity to see how reliable a particular borrower may be. This, of course, can have a negative effect if the borrower has a long history of missed payments. Credit age affects 15% of your score.
Credit score calculators also take into account the types of credit that borrowers have. Different types of credit include credit cards as well as personal, auto, and home loans. Creditors prefer borrowers with the ability to successfully manage a diverse selection of loans, which is reflected in one’s credit score. Credit mix makes up around 10% of your score.
Just like credit mix, hard inquiries affect roughly 10% of your credit score. While this isn’t the biggest factor, having lots of credit inquiries can act as a red flag, letting lenders believe that you are an untrustworthy borrower.
Consumers with five or more hard inquiries within one year are often more likely to be late on credit payments when compared to those without hard inquiries. In order to keep all of your options open when applying for credit, staying on top of all of these categories will come in handy.
In addition to hard inquiries, there is also a thing called a soft inquiry. Unlike hard inquiries, soft inquiries will not have a negative effect on your credit score. Situations that warrant a soft inquiry include:
- Checking your own credit
- Employer run background checks
- Credit card pre-approval
- Insurance applications
Soft inquiries can occur without your consent and only show up on credit reports that you personally request, not the reports that lenders or creditors see.
Unfortunately, if you’re trying to remove a legitimate hard inquiry from your report, chances are you won’t get very far. However, there may be an inaccurate listing on your credit report. In fact, around 20% of individuals have an inaccurate listing on their credit report that is negatively affecting their credit score.
If you see a hard inquiry that you don’t recognize, you have the right to report it to the credit report agency with which it appears. Once you’ve made a report of inaccuracy, the credit bureau has 30 days to investigate the report and share its findings.
However, there are some situations in which a hard inquiry may seem fraudulent but are actually legitimate. These include:
- Providing a vendor with your social security number, which was taken as authorization to run a hard inquiry for financing reasons.
- A car dealership or mortgage servicer sending your loan application to multiple lenders in order to find the most favorable rate
- Store credit cards being listed under different names. Example: If you sign up for a store credit card at Tony’s Furniture, it may show up as something like “XYZ Bank/Tony’s” on your credit report.
If there is a fraudulent hard inquiry on your report, it’s important to have it handled as quickly as possible, as it may be a result of identity theft. While a single fraudulent hard inquiry isn’t the end of the world, it can pose an issue if you already have several existing legitimate hard inquiries listed on your credit report.
At the end of the day, hard inquiries are nothing to be afraid of. However, they should, of course, be dealt with responsibly. Maintaining a high credit score is essential to not only receiving credit but receiving low interest rates, which can end up saving you thousands of dollars in the long run.
By regularly checking your credit score, you can make sure that your hard inquiries remain to spread out. Furthermore, whatever you can do to reduce the total amount of hard inquiries is an easy way to keep your credit score in tip-top shape.
If you do have to apply for a credit card, however, Seek Capital makes it easy to find the best option for you, no matter what your needs are.
Seek Capital provides service for all of your personal and business needs so that you can secure the funding needed to see your dreams come to life. Applying for credit and maintaining your credit score may seem like a daunting task, but staying informed can help you easily stay on track.
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