A large majority of individuals are reluctant to check their credit scores and reports for they fear that doing so may bring down their scores. The truth is that checking your credit report does NOT impact your credit score. In fact, it’s a good financial habit to monitor your credit report regularly, as it helps you keep tabs on your financial accounts.
However, when a lender requests for your credit report it has an impact on your credit scores. This is because the latter inquiries are “hard inquiries” whereas inquiries initiated by self are “soft inquiries.”
In this guide, we help you understand the differences between hard and soft inquiries and how each impacts your credit score, and what you can do to minimise the effect of a hard inquiry.
What is a hard inquiry?
A hard inquiry happens when someone, usually a lender or a credit card issuer requests for your credit report from a credit bureau.
As part of the loan application process, the lender requests a credit bureau for the latest copy of your credit report. The lender then uses the information on your credit report to determine whether to sanction your loan request or not. Whenever a lender/credit card agency or any third-party requests for your credit report, it’s noted on your credit report as a hard inquiry.
Hard inquiries reported on your credit report serve as a timeline for future lenders to see all the times you have applied for new credit. Generally, hard inquiries stay on your credit report for two years but impact your credit score only for one year or less.
Depending on the other information on your credit report, hard inquiries on your credit report indicate different things. For example, if there are multiple hard inquiries recently, it can show to a lender that you’ve been shopping for loans recently.
What is a soft inquiry?
Soft inquiries usually happen when an individual checks his/her credit report and score. Unlike hard inquiries, soft inquiries do NOT impact your credit score. Very often, individuals avoid checking their credit scores because they falsely believe that it damages their score. However, the truth is that you can check your credit score anytime without worrying about hurting your score.
In fact, it’s a good fiscal practice to check your credit scores and reports periodically, say once in every three or six months, so that you can keep track of your financial history. CreditMantri offers a free credit score calculator that allows you to check your score for free within minutes. Use this service to stay on top of your score.
Snapshot of the Differences between Hard and Soft Inquiries
|Hard Inquiry||Soft Inquiry|
|Hard inquiries are a result of external inquiries by a lender, credit card company, etc.||Soft inquiries happen when you check your credit report on your own. It can also be done in the background without your explicit permission.|
|They are primarily used to determine your creditworthiness for a loan or credit card.||The primary purpose of a soft inquiry is informational.|
|It gives a detailed report to the lender regarding your finances.||Soft inquiries done by external agencies are not detailed and contain only basic info regarding your finances.|
|It can impact your credit score, especially when there are multiple hard inquiries within a short span.||It does not impact your credit score.|
|Examples of Hard Inquiries:Loan applications – home loan, car loan, personal loans, etc. Credit card applicationsInsurance applications||Examples of Soft Inquiries:Checking your credit score and report by yourselfPre Qualified credit card offersPre Approved loan offersVerifications done by an employer during job interviews|
*Keep in mind that a third-party agency cannot do a hard inquiry on your credit report without your permission. So, if you’re unsure how a particular inquiry will be classified, you can also ask the lender, credit card company or financial institution for more information.
Are hard inquiries bad for your credit score?
Hard inquiries aren’t bad per se. It’s just a part of how credit reporting works. Hard inquiries can help you see who accessed your credit report, when and why. With that said, hard inquiries can impact your credit score and bring it down, especially if there are multiple hard inquiries within a short timeframe.
Let’s understand why this happens. As you would be aware, your credit score is a result of various financial factors like: payment history, credit utilisation ratio, length of credit history, credit mix and hard inquiries.
Hard inquiries are one of the several factors that make up your credit score. It accounts for 10% of your credit score. Remember that though hard inquiries are part of your credit score, they are not the only factor.
However, multiple hard inquiries within a short time can indicate that you’re hunting for loans/credit cards desperately. This doesn’t work in your favour as it shows to prospective lenders that you’re hungry for credit. Lenders are generally hesitant to extend loans to borrowers who are credit hungry. As a result, multiple hard inquiries on your credit report within a short span can impact your chances of securing a loan/credit card.
How much your credit score drops due to a hard inquiry depends on several factors. Generally, a hard inquiry can bring down your credit score by 5 to 10 points. However, if you have a good credit score to begin with and no other bad credit habits, then the drop may even be less or may not even happen.
How many hard inquiries are too many?
There’s no fixed number. It all depends on each financial situation. For example, if you lose 10 points for each hard inquiry, then five such inquiries can bring down your credit score by 50 points. This is sufficient to get you downgraded from excellent to good credit, or good to fair credit.
So, it’s highly recommended that you space out hard inquiries. This gives sufficient time for your credit score to recover before the next hard inquiry.
Strategies to Minimise the Impact of Hard Inquiries
While it may not be possible to entirely avoid hard inquiries, you can reduce its impact. Here are some strategies to minimise the negative impact of hard inquiries on your credit score.
- Use Loan Aggregators for Loan Shopping
Instead of applying separately with each lender leading to several hard inquiries, you can use loan aggregators like CreditMantri to help you compare and shortlist the best loan offers. This way, you don’t trigger multiple hard inquiries by several lenders.
- Monitor your Credit Report for any Unauthorised Hard Inquiries
While it’s not possible to remove legitimate hard inquiries, if you notice any inaccurate hard inquiries you can challenge them and get them removed. If there are any hard inquiries that were carried out without your permission, then you can raise the issue with the credit bureau and get it removed from your credit report.
- Don’t apply for a loan or credit card if you aren’t confident of the Outcome
Don’t apply for a loan/credit card just to check if you qualify. Also, do your research, understand the eligibility criteria and apply only for loans that you’re likely to be granted. Otherwise you could end up with multiple hard inquiries for no reason at all.
- Be responsible with other Factors that Impact your Credit Score
Making payments on time, having a mix of credits and keeping your credit utilisation low can keep your credit score healthy. Remember, these factors have more influence on your credit score than a hard inquiry. If you have strong credit, then a hard inquiry or two won’t impact your credit scores so much.