Applying for credit or a loan can be routine fiscal decision-making, but with each time that the lender obtains access to your credit report, there can be long-term impact to your credit rating. Credit inquiries are an important part of the way lending companies calculate your creditworthiness. However, not all inquiries are created equal, and knowing the difference between them is vital for protecting your credit record.
Hard inquiries: Small shots with long-term consequences
When a lender performs a credit check before giving you a loan, it’s referred to as a hard inquiry. They occur when you actively apply for a personal loan, mortgage loan, car loan, credit card, or any form of credit that must be repaid over time. Hard inquiries are reported to credit bureaus and will lower your credit score by a small amount, typically three to five points.
While a single question alone is not going to wreak havoc, a series of questions over a brief period might suggest financial hardship or too much borrowing, and would discourage lenders from accepting your loan. These queries stay on your report for up to 12 months, but their impact on your score will generally decrease as the months pass.
Soft inquiries: Good-faith checks for background or offers
Conversely, however, soft inquiries are considerably more pleasant. You notice these whenever you check your own credit score, are pre-approved for a credit offer, or conduct a background check with a review of your credit that is regularly done by a prospective employer. Soft inquiries do not appear on your credit score and are never seen by the lender, though you can see them. So, it’s completely harmless to monitor your credit occasionally or look at pre-qual offers on the web.
The importance of timing
Timing plays a critical role when it comes to hard inquiries. If you’re shopping around for a loan—say, a car loan or home loan—credit bureaus may consider multiple applications made within a short window as a single inquiry. This period can range from two weeks to 45 days, depending on the credit bureau’s policy.
This buffer allows borrowers to compare interest rates and terms without suffering multiple penalties on their credit record. But borrowing multiple types of credit—like a mortgage, credit card, and personal loan—all simultaneously—can still lower your score by a considerable amount.
To safeguard your credit rating, it’s a good idea to be considerate about when and how you apply for credit. Don’t apply for several credits at the same time and use online facilities that conduct soft checks to assess your suitability before you make an actual application. Monitoring your credit record also has the potential to inform you of unauthorized hard checks, which might indicate identity theft or errors.
Savvy handling of loan requests is a small but effective step toward maintaining your overall financial well-being in good order. By understanding how they operate and using credit
responsibly, you can maintain your score in good health and your borrowing options open. Whether you’re thinking about a large purchase or simply juggling daily finances, this knowledge can reap large dividends in terms of long-term financial well-being.
