There are a number of factors that go into a credit score. Some, like payment history, are hugely important and can have a massive impact on your credit score. Others have less of an effect, but that doesn’t mean they’re not noteworthy. A prime example of this is credit inquiries, which may only have a slight effect on your credit score. Regardless, inquiries are still worth knowing about to save yourself a few credit points down the line.
What are credit inquiries?
Credit inquiries occur when entities request your credit information. Whether it’s you or someone else, if your credit score is requested, it’s considered a credit inquiry. The type of inquiry depends on who is asking for your credit information. The Fair Isaac Corporation, the creators of the FICO credit score, breaks inquiries down into two distinct categories: soft inquiries and hard inquiries.
This type of inquiry has no effect on your credit score. The main reason behind this lack of impact is that soft inquiries typically don’t involve the potential for a new line of credit, meaning no new payments. Some examples of soft inquiries include checking your own credit score, a potential employer checking your credit, and pre-approval offers for new lines of credit (like the credit card offers that you may find in the mail). If you choose to accept pre-approval offers, it could lead to a hard inquiry.
This type of inquiry can have an effect on your credit score. This is because hard inquiries typically involve applications for new lines of credit, potentially resulting in new monthly payments. Some examples of these types of applications include applying for a home loan, car loan, student loan, or credit card. The degree to which your score is affected depends on a number of factors, including the number of hard inquiries, the frequency of the inquiries, and what type of credit the inquiries are for. It’s notable that a number of home loan applications in a short period of time can also be seen as shopping around and may have a reduced effect on your score. A number of credit card applications in a short period of time might be seen as an indicator of cash flow problems and could, in turn, have a larger impact on your score.
Protecting your score
Bearing all this information in mind, you may be asking yourself, “How do I protect my score from taking these hits?” Part of building credit is applying for credit and applying for credit means hard inquiries. That doesn’t mean you can’t minimize the damage though. Here are some tips for avoiding unnecessary damage to your score from hard inquiries:
1. Check your credit report regularly. This is something worth doing anyway, but it also helps to keep tabs on who is requesting your credit information and for what purpose. This will help you root out potentially fraudulent inquiries. You can pull a free copy of each of your credit reports once per year from annualcreditreport.com.
2. Dispute unwarranted or fraudulent inquires. All hard inquiries require your consent. If any inquiry you didn’t authorize appears on your credit report, you have every right to dispute the inquiry. If the dispute is won, the inquiry will be removed from your report and any effect it had on your score will be reversed. You can always dispute any incorrect information using annualcreditreport.com.
3. Everyone wants the best interest rate for loans and credit bureaus understand that. This is where “rate-shopping” comes in. Rate-shopping reduces the effect of a set of inquiries to a single inquiry, so long as they’re for the same type of credit and within 45 days. For example, this applies to home loans and car loans. The next time you find yourself hunting for a new car loan, it might be best to limit your interest rate search to 45 days. Depending on your lender, a loan approval can be good for about 90 days, so there’s plenty of time to shop for the right car once approved.
For more information on credit inquiries, check out: https://www.myfico.com/credit-education/faq/credit/how-do-inquiries-impact-credit-scores.
If you’re looking to pull your credit report from one of the three major credit bureaus or dispute any unwarranted or fraudulent inquiries, check out: https://www.annualcreditreport.com.