Credit Inquiries: Hard vs. Soft

People discussing credit inquiries with a laptop, graphs, and papers on the table.

Your credit score is influenced by various factors, including your debt, payment history, and credit mix. One area that often causes confusion is how credit inquiries affect your score. You may have heard that checking your credit can hurt your score, but it’s more nuanced than that. Let’s break it down.

Types of Credit Inquiries

A credit inquiry occurs when someone reviews your credit report. These inquiries fall into two categories: soft inquiries and hard inquiries.

Soft Inquiries

Soft inquiries occur in several situations. These can happen when you check your own credit or when someone, like a potential employer or credit card company, does it for background purposes or pre-approval offers. Here’s what you need to know about soft inquiries:

  • Permission: You generally don’t need to give explicit permission for a soft inquiry, although some entities might still ask.
  • Impact on Credit Report: Soft inquiries may not appear on your credit report, depending on the credit bureau. Even if they do, they don’t impact your credit score.
  • Self-Monitoring: Regularly checking your own credit score is highly recommended. It helps you stay informed about your credit status and make better financial decisions.

Hard Inquiries

Hard inquiries typically occur when a financial institution evaluates your credit for lending decisions, such as when you apply for a loan, a credit card, or a mortgage. Here’s what you should know about hard inquiries:

  • Permission: Hard inquiries require your explicit consent.
  • Impact on Credit Score: Unlike soft inquiries, hard inquiries can lower your credit score. They remain on your report for up to two years, though their effect lessens over time.
  • Frequency Matters: Multiple hard inquiries in a short time may signal to lenders that you are a higher credit risk, possibly suggesting financial instability or difficulty in obtaining credit.

Why Do Multiple Hard Inquiries Hurt Your Credit Score?

When there are several hard inquiries in a short span, it can raise concerns with lenders. They might view this as a sign that you are in financial trouble, possibly borrowing more than you can handle. Multiple inquiries can suggest:

  • Financial Distress: It may look like you urgently need credit or funds.
  • Rejection from Other Lenders: Lenders might assume you’re being turned down elsewhere.
  • Potential Overborrowing: It signals that you might be taking on more debt than you can manage, increasing the risk of default.

Managing Credit Inquiries

Monitoring your credit and managing inquiries wisely can help protect your score. Here’s how:

  • Check Regularly: Review your credit report frequently. This allows you to spot unauthorized hard inquiries, which you can dispute to maintain your credit score.
  • Be Selective: Before agreeing to a hard inquiry, make sure you’re committed to the lender or credit product. Ensure it’s something you truly need.
  • Ask Questions: Always ask if a credit check will result in a hard or soft inquiry before giving permission.

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