Introduction
Credit score is one of the most important aspects in your creditworthiness. Anytime you are applying for mortgage, car loan, or credit card, lenders will always look at your score to determine your creditworthiness. However, as most people fail to know, credit inquiry which occurs when one applies for credit can affect their score.
That is why at Middlesex Healthcare Federal Credit Union we care about our members to be informed about the aspects that reflect on the credit scores. In this article, you will learn about credit inquiries, how they operate, and if they can negatively affect your credit.
- What Are Credit Inquiries?
A credit inquiry occurs when a company, lender, or individual checks your credit report as part of a decision-making process. There are two types of credit inquiries: hard inquiries and soft inquiries.
Soft Inquiries:
A soft inquiry occurs when your credit is checked but not for the purpose of extending new credit. These inquiries do not impact your credit score and can include:
- Pre-approval offers for credit cards or loans.
- Employment background checks.
- Personal credit checks (when you check your own credit report).
Since soft inquiries are only visible to you and not to lenders, they don’t affect your score and don’t signal any change in your financial behavior.
Hard Inquiries:
A hard inquiry, on the other hand, occurs when a financial institution or lender checks your credit report to assess your risk as a borrower. Hard inquiries happen when:
- You apply for a loan (mortgage, car loan, personal loan, etc.).
- You apply for a new credit card.
- A landlord checks your credit before approving your rental application.
While soft inquiries do not impact your credit score, hard inquiries have a way of doing so albeit in a differently calibrated manner.
- How Hard Inquiries Affect Your Credit Score
The impact of hard inquiries on your credit score is usually minor, but it can still be important, especially if you’re planning to apply for multiple lines of credit. Here’s how hard inquiries can affect your score:
Hard Inquiries Can Lower Your Credit Score
A single hard inquiry may lower your credit score by 5 to 10 points, depending on your overall credit health. While this may not seem like much, multiple hard inquiries in a short period can have a more significant impact. That’s because credit scoring models, such as FICO, may view multiple inquiries as a sign that you’re struggling financially or taking on too much credit too quickly.
The Duration of the Impact Is Limited
Fortunately, the negative impact of hard inquiries on your credit score is temporary. Most hard inquiries remain on your credit report for two years but are only factored into your score for the first 12 months. After that, their influence diminishes, and they fall off entirely after 24 months.
- When Do Hard Inquiries Become a Problem?
While one or two hard inquiries are unlikely to cause serious damage, there are situations where they can become problematic. Here are some scenarios where hard inquiries might hurt your score more significantly:
Multiple Inquiries in a Short Time
If you apply for several credit cards or loans in a short period, each hard inquiry can chip away at your score. Lenders may view multiple applications as a sign of financial stress, which could make them more hesitant to extend credit to you.
Already Lower Credit Scores
If you already have a low credit score, hard inquiries can have a more significant impact. For individuals with good or excellent credit, the impact of a hard inquiry is usually negligible. However, for those with lower credit scores, each inquiry can cause a more noticeable dip, making it harder to improve their score.
Seeking New Credit While Applying for Major Loans
If you’re in the process of applying for a major loan, such as a mortgage, you’ll want to avoid additional hard inquiries from other types of credit applications. Even a slight dip in your score could mean the difference between qualifying for a loan or getting a favorable interest rate. For this reason, it’s a good idea to hold off on applying for new credit until after you’ve secured the loan.
- How to Minimize the Impact of Credit Inquiries
If you’re concerned about the effect of credit inquiries on your score, there are several strategies you can use to minimize the impact:
Limit Unnecessary Credit Applications
Only apply for credit when you truly need it. Every hard inquiry counts, so avoid applying for multiple credit cards or loans within a short period. Plan your applications strategically to space them out and reduce the cumulative impact on your score.
Use Rate Shopping Windows
When shopping for loans, do so within a short time frame to take advantage of rate shopping windows. By keeping inquiries for the same type of loan within the designated period (14-45 days), you can reduce the overall impact on your credit score.
Opt for Pre-qualification Offers
Before applying for a loan or credit card, consider opting for a pre-qualification or pre-approval offer. Many lenders allow you to check whether you’re likely to be approved for credit without performing a hard inquiry. This is a soft inquiry and will not affect your credit score.
Bottom Line
Credit inquiries – especially hard inquiries – can have a small but significant impact on your credit score. While soft inquiries don’t affect your score, hard inquiries can lower it slightly, particularly if you apply for multiple lines of credit within a short time frame. However, with careful planning and awareness, you can minimize the impact of hard inquiries on your credit score.
At Middlesex Healthcare Federal Credit Union, we are dedicated to helping our members manage their credit effectively. If you have questions about credit inquiries or need assistance with improving your credit score, our team of financial experts is here to help. Contact us today for personalized guidance on maintaining a healthy credit profile.
