How hard and soft inquiries affect your credit score
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Dear Speaking of Credit,
When an institution does a soft credit check, does that reflect an inquiry? -- Adele
Why is it fair that inquiries impact your credit score? This seems like a very shady way of doing business. --Angela
Dear Adele and Angela,
Your questions about credit inquiries go hand in hand, as they provide us with the opportunity to look at some credit scoring nuts and bolts, such as defining hard and soft inquiries and how they affect credit scores, while also taking a step back to understand the role inquiries play in credit scoring.
Starting with Adele's question, yes, a soft credit check generates a "soft" inquiry on your credit report, while a "hard" credit check creates a hard inquiry. But what exactly do we mean by hard and soft inquiries?
First, "credit checks" or "credit pulls" are how we usually describe a creditor viewing a consumer's credit report or score after the creditor receives a credit application or you accept a credit offer. The term "inquiry" specifically refers to the notation added to your credit report any time your credit bureau report is accessed, whether by you or a company with a legal right to evaluate your credit. Such notations remain a part of your credit file for two years, though inquiries that are considered by credit scores only come into play during their first year.
Hard and soft inquiries defined
A hard inquiry appears anytime you initiate a credit check by either submitting a credit application or accepting of a credit offer.
Soft inquiries make up some of the less-direct credit checks that, with one exception, you do not initiate, such as:
- Account review. A creditor with which you have an existing account periodically evaluates how you're handling your other credit obligations.
- Promotional. At a lender's request and using specific criteria, the credit bureau supplies your name and address to the lender for the purpose of making you a credit offer.
- Insurance. An insurance company uses credit-based insurance scores for insurance premium pricing.
- Employment. As part of a job application evaluation, a prospective employer uses credit bureau information to gauge an applicant's level of financial responsibility.
- Credit monitoring. This is the exception. You may check your own credit as much as you like without it being considered a hard inquiry. The self-checking may take place directly at the credit bureau or through one of the many credit websites authorized to obtain credit bureau information and scores for subscribers.
Impacts of inquiries on credit scores
The key difference between soft and hard inquiries is:
- Soft inquiries have no impact on credit scores and are only viewable on credit reports seen by consumers.
- Hard inquiries are visible to both consumers and creditors and can have a slightly damaging effect on your score.
Hard inquiry impacts for revolving credit
When pulled by a retail, credit or charge card company, every hard inquiry has the potential to hurt your score, regardless of how many hard inquiries are generated within a single day, month or other time period during the past year. In other words, every card hard inquiry can count.
Hard inquiry impacts for installment credit
For hard inquiries resulting from auto, student or mortgage loan applications, a special allowance is made for interest rate shopping, such that multiple inquiries occurring during a focused period of time -- typically 14 to 45 days -- are counted as a single inquiry to prevent penalizing your score when you're simply being a prudent borrower looking for the best rate on a loan. See "How credit score formula handles multiple credit inquiries."
Why do inquiries matter to the score?
With your question, Angela, you make an excellent point, particularly from a common-sense perspective. After all, paying on time versus being late, owing small versus large dollar amounts, or having extensive credit experience versus being new to credit are no-brainers when predicting whether someone will prove to be a good credit risk.
But, one might ask, since when does the fact that your credit has been recently checked by a credit granter mean you're now less likely to pay your cards or loans on time?
Perhaps the rationale behind such credit scoring treatment of inquiries can be made clearer if we take a look at the life cycle of a credit card that goes bad. Here is a simple, but typical sequence of credit reporting events that take place along the path from inquiry to charge-off. In parentheses are the scoring category associated with the event, and the category's percentage of your total score:
- Inquiry (New accounts = 10 percent)
- New account (New accounts = 10 percent)
- High balance (Amounts owed = 30 percent)
- Delinquencies (Payment history = 35 percent)
- Charge-off (Payment history = 35 percent)
Most cards won't go bad, but in the ones that do, the initial inquiry was the leading indicator of a bad outcome. And since lenders use credit scores not only to approve applications but also to avoid future losses, this is where such early warning flags help the score do its job.
What all this means within the big credit scoring picture is that as long as you consistently pay on time, keep card balances low and apply for new credit sparingly, a few points lost due a few inquiries within the past year will not cause you to be turned down for credit or pay a higher-than-normal interest rate on a loan. Still, though, great questions!
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