What You Should Know About Hard And Soft Credit Inquiries

A credit report is the key to your financial security. Credit reports tell lenders all of the information they need in order to determine your creditworthiness. They look at your credit score and base credit decisions and interest rates off of that. There are many components that make up your credit score. Payment history, average age of accounts, debt to credit ratio, and several other components go in to calculating the credit score a lender will see. One component involved in the credit score is the number of inquiries you have. A credit inquiry exists in two forms. A hard inquiry is one that counts against your score while a soft inquiry does not.

Essentially, a hard inquiry is initiated by you. When you apply for a new loan or a credit card, a company will run your credit. Rather you are approved or not, that inquiry will count against your score for up to two years. This means that when you open up a new credit account, your score will lower a bit because of the inquiry and the reduction in the average age of accounts. As you make regular payments, they will outweigh the score impact of the inquiry and improve your credit score.

There are many examples of hard inquiries. Opening a new loan such as car or home loan is one of them. Credit cards also count as hard inquiries. Some banks may also cause a hard inquiry when opening a new account for you. In addition, some utilities and cell phone companies that run your credit may also result in a hard inquiry. One thing you should know is that when you are applying for a car or home loan, you are allowed to rate shop. This means that within a 14-45 day span depending on the credit bureau, all of your auto applications will count as one hard inquiry against your score even though all will be listed on your credit report. The same rule does not apply for credit cards.

In addition to hard inquiries, you will also see soft inquiries listed on your credit report. Soft inquiries are listed on your credit report but have no impact on your score. The most common soft inquiry is when you pull a copy of your own credit report. Also, many lenders will initiate a soft inquiry in order to prequalify you for a loan or credit card. These soft inquiries result in the offers you get in the mail. If you don’t initiate the process, that inquiry won’t hurt you. However, if you respond to an offer you receive in the mail and apply for a credit card through that it will count as a hard inquiry at that point.

Employers nowadays also check credit when screening applicants. When they do it will count as a soft inquiry. Insurance companies and several utilities also use soft inquiries. These are needed services, so you do not hurt your credit by using them. Lastly, if you have an existing account with a company they might check your credit periodically. This is what leads to credit limit increases with a credit card company or a change in interest rates with a bank.