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Hard inquiries: How they work when you apply for credit

Summary

Our experts explain how much they hurt your credit score and how long they linger on your report

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You’ve heard the cautionary advice that applying for too much credit at once can give you a black mark on your credit report.

We wanted to dig deeper to find out which scenarios are more likely to affect your credit adversely. For example, how quickly does a “hard pull” show up on your report? How bad is an “app-o-rama,” in which you apply for a bunch of credit all at once? Are you penalized for shopping around for the best mortgage interest rate?

We gathered a group of experts to explain exactly how the credit bureaus’ cogs turn when you apply for credit.

What’s the difference between a hard and soft inquiry?
Let’s start with what is meant by a hard pull (also known as a hard inquiry). A hard inquiry means you are actively applying for credit. Once you fill out the application and hit “send,” the lender has instant access to your credit report for the purpose of evaluating your creditworthiness. Simultaneously, that lender is also sending a notification to one of the three credit reporting bureaus that you have applied for credit.

A soft inquiry, on the other hand, is a less-direct credit check. Anytime you review your own personal credit report, are evaluated by companies with whom you currently have loans or credit or you receive a promotional credit card offer in the mail, it’s the result of a soft inquiry. Soft inquiries have no impact on your credit report or score.

The big three credit bureaus (and FICO)
The three credit bureaus (TransUnion, Equifax and Experian) compile information from creditors and maintain a file of your credit history. Not all lenders report to all bureaus, so their files can vary.

Each of the three bureaus weighs each aspect of your credit report – including hard inquiries – a bit differently and operates on a slightly different scale. The FICO score, which is calculated based on the information in these reports, is the most commonly used, but its calculation can still vary based on the bureau’s algorithm.

“Most of the time, we will see credit card companies check only one bureau and approve or not approve based on that agency’s data,” said Eddie Johansson, president of Credit Security Group, where he has analyzed more than 15,000 credit reports. “Experian is by far the most common, then Equifax, then TransUnion.”

If you are applying for a larger loan, such as a mortgage, your lender is more likely to check more than one bureau.

How big is the ding?
How big of a hit on your score do hard inquiries create? It varies.

“Applying for one credit card every so often is no big deal, but when you apply for more than one at a time, you look desperate for money that you don’t have to prove you have upfront, and that is why it can have a decent effect on lowering your credit score,” says Matthew Coan, owner of the credit card comparison website Casavvy.com.

The impact also depends on your existing credit history. “The hit is usually about three to five points per inquiry,” said Priyanka Prakash, of FitBiz Loans. “While that may not seem like much, it adds up – particularly if you have borderline credit to start with. For some people, there’s no impact from a hard pull. In general, the shorter your credit history, the fewer accounts you have and the more recent inquiries you have, the greater the impact.”

Senior loan officer Heather McRae of Chicago Financial Services says she has seen a single hard inquiry drop a credit score by 12 points. “You can imagine the impact multiple inquiries can have,” she said.

Those inquiries stay on your report for two years.

How quickly will you get dinged?
Financial experts say that inquiries typically happen immediately (which is why you will tend to receive an answer immediately whether you are approved), and the inquiry is also reported right away.

However, the “ding” to your credit score “could also happen in real time or it could take up to 30 days to show up,” said Coan. “Just because your credit score doesn’t go down right away doesn’t mean that the credit card company won’t see what cards you have already applied for.”

How shopping around affects your score
Let’s say you’re shopping around for the best mortgage rate or car loan rate. Will you be penalized for all the hard pulls while you’re comparison shopping?

Not necessarily – but group your applications together as much as possible to be on the safe side.

“All mortgage inquiries in the same 14-day period will count as one,” Johansson said. “And there is a 30-day buffer, meaning no inquiry in the past 30 days affects your score today.”

A word about app-o-ramas
App-o-ramas came into vogue in the early 2000s, as consumers sought a way to obtain multiple balance transfer offers or pile up big reward sign-up bonuses. In an app-o-rama, a person will apply for a lot of credit in a short period of time – such as a day or two – in hopes of gaining easy credit without the blemishes of multiple hard inquiries showing up on his or her credit report.

They can work, but they can be dangerous to your credit, too, so lending experts advise caution.

“Consumers need to use inquiries only when needed,” Johansson said. “I would never advise an app-o-rama, as the long-term result will be too many inquiries affecting other significant purchases, like an auto loan or a home loan that could be coming in the next 12 months. Credit reporting is not a system you can game.”

Prakash agrees, saying that although app-o-ramas may work in the short term, “You will feel the effect in a few weeks. And the impact to your score doesn’t wear off for one year.”

In other words, if you have a major purchased planned down the road, don’t risk it.

The takeaway
The bottom line experts emphasize is that people should be judicious with their credit applications. Even if you don’t anticipate that you will be buying a car or a house in the future, filling out lots of credit or loan applications can have detrimental effects.

“Over the past decade, I’ve seen many people that could have gotten a better, lower interest loan if only they had a few more points,” Johansson said. “Many times they’ve signed up for a new credit card through a retailer to save $50 on a purchase. They buy a car three months later, not knowing that the card cost them much more in a higher interest rate for their car.”

See related: How hard and soft inquiries affect your credit score, How credit score formula handles multiple credit inquiries, Why hard inquiries hurt your credit score

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