The Impact of Hard and Soft Credit Inquiries on Your Credit Score

Introduction

Knowledge of what shapes credit score is very vital to every consumer; it will help him or her to lead a healthy financial life. Another area that people usually do not understand is the distinction between the types of credit checks and how they affect the credit score. Thus, this article will help borrowers, readers, and customers of 3 Credit Scores to understand these inquiries, their consequences, and how to deal with them.

What are Credit Inquiries?

Inquiries are reported when another company has requested your credit report, for example, when you have applied for a loan or credit card. There are two types of credit inquiries: hard and soft. Every type of inquiry is unique in terms of its impact on your credit and general well-being.

Hard Credit Inquiries

Hard credit inquiry or hard pull on the other hand is when a potential creditor pulls your credit history to make a decision on whether to approve your credit application or not. This mostly occurs when you are applying for a mortgage, car loan, credit card or any form of credit. They are reported on your credit report and they lower your credit rating.

Impact on Credit Score: 

Hard inquiries can negatively affect your credit score ranging from 5 to 10 points in every inquiry. It is worse when several hard inquiries are conducted within a short time because they may suggest to credit lenders that you are in need of large credit or facing financial difficulties.

Duration on Credit Report: 

Hard inquiries are also on the credit report for two years but their effect on the credit score is gradually reduced over time. The most telling results are normally felt within the first six months of the implementation of the change management strategy.

Soft Credit Inquiries

Soft credit check also referred to as a soft pull is a situation where a credit report is pulled for reasons other than approving loans. Some examples are pre-approved credit card offers, employment background checks, and credit checks on individuals.

Impact on Credit Score: 

Soft inquiries do not harm your credit score in any way. They are only reported to you and are not included in any credit scoring algorithms or formulas.

When They Occur: 

Soft inquiries can happen without your explicit permission. For instance, when a credit card issuer pre-approves you for an offer or when you check your own credit report.

Managing Hard and Soft Inquiries

Effectively managing hard and soft inquiries can help you maintain a healthy credit score and avoid unnecessary dips in your credit rating. Here are some strategies to consider:

1. Limit Applications for New Credit:

Each application for new credit results in a hard inquiry. To minimize the impact on your score, apply for new credit only when necessary and avoid multiple applications within a short timeframe.

2. Rate Shopping:

When shopping for a mortgage, auto loan, or student loan, multiple inquiries within a specific period (usually 14 to 45 days) are typically treated as a single inquiry by credit scoring models. This allows you to shop for the best rates without significantly impacting your score.

3. Monitor Your Credit Regularly:

Regularly checking your credit report can help you stay on top of your credit inquiries and ensure there are no unauthorized hard inquiries. Remember, checking your own credit report is a soft inquiry and does not affect your score.

4. Opt-Out of Pre-Approved Offers:

You can opt-out of receiving pre-approved credit offers, which can reduce the number of soft inquiries on your report. Visit the official opt-out websites to manage your preferences.

The Importance of Credit Inquiry Management

Proper management of credit inquiries is vital for maintaining a good credit score. Here are some reasons why managing inquiries is important:

1. Protect Your Credit Score:

Limiting hard inquiries helps prevent unnecessary drops in your credit score, which can affect your ability to obtain favorable loan terms and interest rates.

2. Prevent Identity Theft:

Monitoring your credit report for unauthorized inquiries can help you detect and address potential identity theft or fraud early.

3. Improve Loan Approval Chances:

A lower number of hard inquiries can make you more attractive to lenders, increasing your chances of loan approval.

Some of the Frequently Made Errors when it Comes to Credit Inquiries

There are many misconceptions and myths regarding credit inquiries. Clarifying these can help you make informed decisions about your credit management:

1. Checking Your Own Credit Hurts Your Score:

Some of the activities that do not affect your credit score include; The earlier stated that getting your own credit report is actually a soft check. It is recommended to check your credit report from time to time.

2. Hard Inquiries Are All Bad:

To sum up, hard inquiries cause a temporary decrease in the score but are inevitable when applying for credit. However, if credit is used responsibly after a hard inquiry has been made, then the effects are not long-term.

3. Soft Inquiries Are Irrelevant:

Soft inquiries do not affect your score; however, they are useful in identifying who is requesting your credit report. It will assist in ensuring you get updated information concerning the activity of your credit report.

Ways to Minimize the Hard Inquiry

To maintain a healthy credit score, consider these tips for reducing the number of hard inquiries on your credit report:To maintain a healthy credit score, consider these tips for reducing the number of hard inquiries on your credit report:

1. Consolidate Credit Applications:

When you require to open many credit accounts, it is advisable to open them within a short time to reduce effect.

2. Pre-Qualification Checks:

Employ the pre-qualification tools which are provided by most of the lending companies. These checks use soft inquiries and can help you know if you meet the requirements for a loan or a credit card.

3. Avoid Unnecessary Credit:

You should only apply for credit when it is necessary. Do not open any credit accounts in your name just because the accounts offer you credit.

Bottom Line

It is important to know how to work with the hard and soft credit inquiries in order to maintain a good credit score. Although hard inquiries do affect your score, they are inevitable if you are applying for new credit. Soft inquiries, on the other hand, are non- intrusive, and they offer information that is relevant without pulling down your score. Therefore, it is possible to defend and even enhance the credit score with the help of proper handling of inquiries, constant credit report check, and wise financial decisions. At 3 Credit Scores, we want to empower you to understand what is happening in your credit journey so that you can make the right decisions for your credit situation.