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Understanding Credit Inquiries: Hard vs. Soft

Along your financial journey, it’s likely that a business or service provider will check your credit. Credit inquiries are crucial in the credit evaluation process, helping lenders understand your financial history and the likelihood of fulfilling financial commitments.

What Is a Hard Credit Inquiry?

When you apply for credit, such as loans or credit cards, lenders request information from one or more of the three consumer credit bureaus (Experian, TransUnion, and Equifax) to assess your creditworthiness. A hard inquiry, also known as a “hard pull,” occurs when a lender accesses your credit file to decide whether to approve you for a loan or line of credit.

Common scenarios for hard inquiries include:

• Applying for a new credit card
• Purchasing or leasing a car
• Buying a house
• Applying for a personal loan
• Renting or leasing an apartment

Do Hard Inquiries Affect Your Credit Score?

Hard inquiries can impact your credit score, though usually minimally and for a short period. Each hard inquiry can cause a slight drop in your credit score, typically less than five points. Hard inquiries stay on your credit report for two years but affect your score for less than a year. While they’re on your credit report, they are visible to anyone who checks your credit.

It’s wise to limit the number of hard inquiries on your credit report. If you’re considering buying a home or making another sizable financial commitment, limit your credit applications for several months. When rate shopping for a loan, multiple inquiries within a specific period (usually 14 to 45 days) for the same purpose are counted as one inquiry by credit scoring companies. This reduces the impact on your credit, allowing you to compare rates to find the best loan options. However, inquiries related to credit card applications are not treated the same way; each credit card inquiry will appear individually on your credit report.

What Is a Soft Credit Inquiry?

While lenders perform hard pulls to decide if they want to lend you money, a soft inquiry happens when someone checks your credit unrelated to a specific credit application.

Reasons for a soft credit inquiry include:

• Checking your own credit
• Loan preapproval
• Preapproved offers
• Employment background checks
• Requesting utilities

Do Soft Inquiries Affect Your Credit Score?

Unlike hard credit inquiries, soft credit pulls do not affect your credit score. Soft inquiries are generally used for informational purposes, not loan-related decisions.

How Long Do Inquiries Stay on Your Credit Report?

Both types of inquiries appear on your report for up to two years. Soft inquiries don’t impact your credit score, while hard inquiries can decrease your score by a few points, especially if there are many different types of inquiries in a short period. A hard inquiry will impact your score for less than a year.

How to Minimize Credit Inquiries

While a hard inquiry will rarely be the sole reason you’re denied credit, it’s important to be mindful of the number of hard inquiries on your credit report. Here are some ways to avoid too many hard inquiries:

• Get prequalified: Take advantage of prequalification offers before formally applying for credit. Prequalification typically involves a soft credit inquiry and provides an idea of your eligibility without affecting your credit score.
• Use the rate shopping window: When shopping for a mortgage, auto loan, or private student loan, research and apply within a specific timeframe (within two weeks if possible) to ensure multiple inquiries are treated as a single inquiry, minimizing the impact on your credit score.
• Limit new credit card applications: Avoid applying for new credit cards frequently. Each new credit application can result in its own hard inquiry and potentially lower your credit score.
• Monitor your credit: Regularly review your credit reports to ensure accuracy and identify any unauthorized inquiries or potential fraud. You can get free credit monitoring from Experian and receive alerts anytime there are changes to your Experian credit report.

The Bottom Line

A solid understanding of hard and soft inquiries is critical for maintaining a healthy financial profile. Hard inquiries can impact your credit score negatively for up to a year and remain visible on your report for up to 24 months, while soft inquiries don’t affect your score. By taking proactive measures to minimize hard inquiries, like applying for new credit only when necessary, getting preapproved, and comparing options before submitting applications, you can better safeguard your financial well-being.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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