Keeping Score

Why does a hard inquiry hurt your credit score?

New credit inquiries – especially a lot of them all at once – can give lenders the impression you’re a risky borrower


A hard inquiry – which occurs when a consumer applies for a credit account – is an indicator of uncertainty, and that equates to a possible increase in risk for a lender.

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Dear Keeping Score,

Why does a hard inquiry hurt your credit score? – Jared

Dear Jared,

It’s true that a hard inquiry can cause damage to a credit score – especially if you have a thin or short credit file. For those with more in their file, the impact may not be as great. What it all boils down to is that a hard inquiry is an indicator of uncertainty, which equates to a possible increase in risk for a lender. Let me explain.

First off, let’s define a hard inquiry as opposed to a soft or any other type of inquiry. We have all received offers from time to time that announce we have prequalified for a new credit card, a loan or some other financial product.

This doesn’t mean we will get what is offered. No, it means we have been included in a large group of candidates whose credit data appears to make them good potential customers. Typically, this list of contenders is the result of a high-level search based on certain characteristics the lender may find attractive.

For example, I may ask for a list of males who have a certain payment record, own a home and had a car loan but paid it off. But there are no income figures in your credit report, so any actual granting of credit must wait for further information. The hard inquiry is specifically about your record and gives the inquirer all your information, not just the bits for which it broadly scanned an entire database.

When a person applies for new credit, a new “hard” inquiry is generated. This is done so that the entity that will (or will not) grant the credit can see how the person applying has handled their credit obligations in the past.

On the other hand, any prequalified offer you receive generally results in a soft inquiry, which has no effect on your credit score.

See related:  Should I apply for a bunch of credit cards to get the best offer?

New credit inquiries can raise red flags for lenders

What creditors like to see are consumers who pay their bills on time and as agreed. They also like to see low credit usage relative to your credit limits (under 25 percent is good; under 10 percent is great). These two areas – payment history and credit utilization – make up 65 percent of a person’s credit score.

The remaining 35 percent is length of credit history at 15 percent, credit mix (the kinds of credit you have, like credit cards and installment loans) at 10 percent, and finally new credit (those pesky hard inquiries you are asking about) at 10 percent. Why should the 10 percent from new credit and inquiries make that much difference to a would-be creditor? I’ll tell you.

It’s because a hard inquiry injects an amount of uncertainty in your file. Why did you apply for new credit? Are you going to max out the new credit line? Is the new credit a sign of instability? These are all potential red flags for a lender.

When the credit scoring elves at FICO and VantageScore look at this new activity on your file their historical algorithms tell them that a certain percentage of people really do max out their new lines and some even go into default in a year or two. So, until you demonstrate (to their models) that you are a still wise credit user, your score declines. This drop is more pronounced in a file with less credit history.

This is especially true if several inquiries are made in a relatively short period of time. If a creditor sees a bunch of new accounts in a potential customer’s credit report, alarm bells are going to sound.

In my first book, “Credit Repair Kit for Dummies,” I point out that one inquiry may have no effect on your score at all and, in general, only takes five points or less off a mature score. But lots of inquiries can signal greater risk to the creditors.

Page 120 of that book lays it out this way: “For example, industry statistics show that six inquiries or more on your credit report means that you may be eight times more likely to declare bankruptcy than if you had no inquiries on your report.”

FICO only counts inquiries over the past 12 months in its scoring matrix, even though the inquiries stay on your credit report for two years. So we are talking about a bunch of new accounts in a 12-month-or-less period. Risk is what it’s all about for the creditors, and analyzing what kind of profit or loss a potential customer poses is why hard inquiries can bring your score down.

See related:  I mistakenly applied for a store card. Can I stop it from dinging my credit?

The credit score effects of inquiries are limited

I want to point out that when you are shopping for a mortgage or an auto loan, depending on the scoring version used by the lender, these rules don’t apply as long as the inquiries fall within a short time frame. The FICO scoring model ignores loan inquiries that have occurred within the past 30 days. And multiple inquiries that fall within a 45-day (newer scoring version) or 14-day (older scoring version) period count as only a single one – the one you ultimately go with.

Also, remember that most credit scores that drop due to inquiries will bounce back after a few months of good credit behavior by the consumer. And keep in mind that if it’s only one or two inquiries and the credit is granted, the increase in available credit could balance out any points lost due to the inquiry.

But for anyone contemplating a mortgage or other large credit purchase, my advice is to put any plans to apply for new credit on hold until after any credit reports for a mortgage loan are in your rearview mirror.

I hope I have actually answered your question to your satisfaction. If I have not, please write again. That’s what I’m here for.

Remember to keep track of your score!

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