Credit inquiries do not significantly impact your credit score if done with due prudence. The problem is when you don’t take enough precautions during the process, whether due to lack of knowledge or any other reason.
These inquiries are made whenever you or any financial institution looks at your credit report. Generally, both lenders and banks perform this action to find out if you are (or are not) a financial risk.
What exactly is a credit inquiry?
As the name implies, it is a credit inquiry performed by the account holder, lenders or bank representatives. The report from this review will let them know if you have been using a credit benefit ethically and responsibly.
Usually, it is done when a person is interested in accessing a financial product such as a credit card. But also when you want to access a loan or when you have made the decision to take on a major financial responsibility.
Currently, there are up to two types of credit inquiries.
1. Soft credit inquiries
This is known as a soft draw. It is directly related to when a particular company has access to your credit history for reasons that have nothing to do with a new financial responsibility.
It is also known as soft credit inquiries when a certain company preemptively pulls your credit information to anticipate the approval of any financial product, such as credit cards.
When a soft credit inquiry is made on your credit, it is because:
- Insurance quotes are being made.
- Employees of an entity perform some verification of your credit.
- Periodic monitoring of any credit service is performed.
- There is an order to decrease or increase a credit limit directly from the credit cards without being requested by the cardholder.
2. Hard credit inquiries
These are the ones that generally affect credit scores. This type of inquiry shows that the person is willing to assume a debt. This can be a mortgage, personal loan or credit card.
A company must have the holder’s authorization to perform this comprehensive monitoring. This type of inquiry is also usually given for:
- Request to materialize the rental of a real estate property.
- Applications for a credit card.
- Request for a loan, either personal or for automobiles. Mortgages also fall into this category.
- Affiliation to a new insurance policy.
- Increase a line of credit.
- Intentions to use a debit card for a car rental payment.
How many points does a hard inquiry affect credit score?
You should first know that the hard credit inquiry is responsible for only 10% of your credit score. Payment history, on the other hand, accounts for 35%.
For the same reason, this in-depth credit inquiry will lower your score by up to five points. The credit report records information related to your queries over two years, but it will only affect the account in question for one year. Another important consideration is the fact that inquiries are cumulative.
To better understand this point, consider purchasing a new service or cell phone plan during March. But in April, you apply for a credit card at the bank of your choice. In this case, your credit score is likely to be considerably affected.
It may be that, in this case, your credit score will increase by the corresponding five points for making several inquiries.
How can you lessen the impact of hard credit inquiries?
There is a way to reduce the impact of hard credit inquiries. The best thing to do is not to apply for several loans in a very short period. Another option is to minimize the number of credit purchases in a short time if you are thinking of applying for personal, auto or mortgage loans.
But you can also reduce or even completely eradicate your credit inquiries. It is possible when, for example, you have been a victim of fraud such as identity theft. In this case, you will have the opportunity to dispute the problem with any credit reporting company. These are TransUnion, Experian and Equifax.
What happens to credit reports after a pre-approval?
A person has applied for a personal loan, car loan or mortgage. And it may be that after being pre-approved for any of these financial products, they may not find the asset they want to buy within a stipulated time frame.
But when the lender issued the approval letter for their application, it did so based on their current credit score and financial situation. If they wait for the purchase, apply for a credit card or any other product, their loan closing will likely be delayed even longer.
The reason is that the new report has recorded the completion of inquiries that were not considered during the previous approval. Therefore, it is best to avoid further applications until the corresponding loan is received.