When you apply for a credit card, loan, or financing, the lender will likely make a credit inquiry. These inquiries come in two forms: “hard” and “soft”. Understanding the difference between them and how they impact your credit score is essential for maintaining strong financial health.
What is a Credit Inquiry?
Hard Inquiry: Occurs when a lender checks your credit report to make a decision about a credit application. These inquiries can slightly lower your score and remain on your credit report for up to two years.
Soft Inquiry: Happens when you or a company checks your credit without a formal application, such as during a background check or a pre-approved offer. These do not affect your credit score.
How Do Hard Inquiries Impact Your Score?
Hard inquiries can reduce your credit score by a few points. While the effect is generally small, multiple inquiries in a short period can add up and have a more noticeable impact. However, credit bureaus typically group multiple inquiries related to mortgages, auto loans, or student loans made within a 14 to 45-day period as a single inquiry to minimize the impact.
Tips to Manage Credit Inquiries
Plan Your Credit Applications: Avoid applying for multiple credit accounts in a short period. If you’re shopping for a mortgage or auto loan, submit all applications within a two-week window.
Monitor Your Credit: Regularly check your credit report to track inquiries and confirm they are legitimate.
Ask Before You Authorize: Before allowing a company to check your credit, ask whether it will be a hard or soft inquiry.
Limit Unnecessary Applications: Only apply for credit when it’s truly necessary and when you’re ready to take on the financial responsibility.
Conclusion
Understanding how credit inquiries affect your score is crucial for maintaining strong financial health. By managing your credit applications wisely and staying informed about your history, you can minimize negative impacts and make smarter financial decisions.
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