Everything You Need to Know About Credit Inquiries

credit inquiries

By Sean Bryant

No matter if you’re looking to rent an apartment, purchase a new home, or land your dream job, credit checks are a vital part of the process. But did you know there are different types of credit checks? Each have their own purpose and each affect your credit in different ways.

There are two types of inquiries when it comes to your credit: hard and soft inquiries. Keep reading as we dive deeper into everything you need to know about the different types of credit inquiries, what they could mean when you’re applying for credit, and the impact they could have on your credit score.

What is a soft credit inquiry?

You’ve probably heard the term soft inquiry, which is sometimes referred to as a soft pull. These inquiries are frequently done when a background check is performed. It could happen when you’re going through the hiring process for a new job. It can also happen when a credit card issuer is considering you for a credit limit increase or considering you for a pre-approved credit card offer.

You might be shocked to know that soft inquiries can be done without your consent or social security number. If you’re like many people, you probably receive multiple credit card applications in the mail each week. In that case, the card issuer actually performed a soft inquiry so they could pre-approve you for that offer.

“Creditors and insurance companies have the right to view your credit and prescreen you for offers. These are soft inquiries into your credit, which do not hurt your scores. If you wish to stop being prescreened for five years, you can simply call 888-5-OPT-OUT,” says Sarah Brady, financial consultant.

Basically, a soft credit check is what happens when your credit report is being used for educational purposes only, not in more official cases, like when a lender is trying to determine your credit-worthiness.

Another example of a soft inquiry is when you check your own credit report. A good general rule is to check your credit report at least once per year. That way, you can review your reports for any missing or false information, as well as for potential signs of identity theft. Your credit report can also provide clues for how to improve your credit.

You can get one free copy of your credit report from each of the three major credit bureaus once every 12 months by visiting AnnualCreditReport.com.

It’s also becoming common for credit card issuers to offer credit score reporting on your monthly statement as a perk of being a cardholder. In order to provide you with your score, they do a soft inquiry.

Looking for other examples? Here are a few of the most common cases that involve soft credit inquiries:

  • Employer background check
  • Checking your own credit report or credit score
  • Credit card account maintenance
  • Renting an apartment
  • Setting up utilities in a home
  • Prequalified offers from credit card issuers
  • Prequalified offers from insurance companies

What impact will soft inquiries have on credit?

The thought of a credit inquiry being done without your consent might make you a little uneasy. Luckily, soft inquiries have no impact on your credit score. They do, however, get added to your credit report, but are only visible to you.

Soft inquiries are typically listed in a section specifically for inquiries that do not affect your credit. You should also be able to see the date of the inquiry and the name of the company who requested it.

Even though a soft inquiry has no impact on your credit score, it’s important to pay attention to who requests them. While companies can perform soft inquiries without your consent, they still must have a valid reason for completing a soft pull on your credit.

It’s not uncommon to be unfamiliar with those performing a soft inquiry. Oftentimes, they’re listed under an abbreviated name or even the name of a parent company. Again, if you’re not comfortable having soft pulls done without your knowledge, be sure to opt out of being pre-screened.

What is a hard credit inquiry?

Hard inquiries or hard pulls are performed by lenders and credit card issuers when making lending decisions. Unlike a soft inquiry, hard inquiries are a factor used to determine your credit score. Each time a hard inquiry is done, your credit score is affected by a few points, since new credit lines count for 10% of your FICO credit score.

“Hard inquiries impact scores differently for each of us. The more credit lines you already have, the smaller the impact of one inquiry will likely be. The fewer credit lines open, the more impactful one hard inquiry could be,” says Kelsa Dickey, owner and financial coach at Fiscal Fitness Phoenix.

Hard inquiries typically stay on your credit report for two years. However, the impact on your credit typically passes well before that.

Below is a list of some common reasons for a hard inquiry:

  • Credit card application
  • Mortgage application
  • Student Loan Application
  • Auto loan application
  • Personal loan application

For the most part, any time you complete a credit application, your potential lender will perform a hard credit pull.

Avoiding hard credit inquiries when possible

The number of hard inquiries on your credit report helps to determine your credit score. But it’s not the only credit score factor considered. Payment history, credit utilization and the average age of your credit accounts also help determine credit scores.

Over the course of your adult life, it’s normal to take out loans or credit cards, but it’s important to be selective. Think twice before you apply for multiple credit cards or before planning a new home purchase. You might also want to reconsider getting store credit cards just because a 20% off coupon seems attractive.

Having too many hard inquiries in a short period of time isn’t what a lender usually wants to see. Depending on the type of loan it can be a warning sign that there might be trouble ahead. Too many new credit accounts could signal to lenders that you’re in financial trouble, and might not be able to repay any new credit.

“Try not to shop for multiple types of credit in a short period of time - a new car, mortgage and credit card for example,” says Dickey.

Not all inquiries affect all three credit bureaus

Keep in mind that many lenders don’t pull information from all three credit bureaus. Some only pull financial information from one credit bureau. At the same time, many of them only report credit history to one bureau too. So if your reports (and scores) look different for the different reporting agencies, that could be based on the fact that each bureau receives and processes different information.

Minimizing the effects of hard inquiries

By now you should understand that each time you apply for a loan (with a few exceptions) a hard inquiry is performed on your credit report. So does this mean if you’re applying for an auto loan or a mortgage you can’t shop around because of multiple inquiries affecting your credit? Not at all.

Rate shopping, if done within a specific timeframe, shouldn't hurt your credit score too much.

“Typically when you are applying for the same type of credit all at the same time (i.e. car loan from multiple banks or lenders), your score will not be impacted for each one. They will be seen as one inquiry. So if you are rate-shopping, in order to minimize the impact of these inquiries on your score, you'll want to do so within a 30 day period,” Dickey says.

Disputing a hard credit inquiry

Most credit experts recommend checking your credit report frequently. Frequent checks can give you the peace of mind that there isn’t anything on your credit report that shouldn’t be there.

So what if there is a hard inquiry included on your credit report from an account you don’t recognize? Don’t worry, there are steps you can take to mitigate these issues.

“If you find an inquiry on your credit reports by mistake, you can dispute the inquiry and have it removed relatively easily. You should never hire a credit repair company, because filing a dispute is free and easy to do. Simply locate and follow the dispute information on your credit report,” says Brady.

Final thoughts

Your credit score plays a large role in your financial life. Good scores tend to lead to better interest rates while lower scores can end up making things cost more (because of higher interest rates). By understanding the difference between a soft and hard inquiry, as well as what leads to each, you should be able to make more informed credit decisions in the future.

About the author

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards and travel. With nearly 10 years of writing experience, his work has appeared in many of the industry's top publications. He holds a Bachelor of Arts degree in Economics. He also runs OneSmartDollar.com.

Written on April 30, 2019

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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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