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When you apply for credit, the creditor will likely conduct a hard credit inquiry. This is a standard part of the loan application process as the creditor wants to understand your creditworthiness better and determine your potential credit limit ability to pay back your loan within your loan terms. But a hard inquiry affects your credit score and can impact your score by as much as five points.
Highlights & Key Takeaways
- When a lender or company requests to review your credit reports after you've applied for credit, it results in a hard inquiry
- Hard inquiries usually impact credit scores
- A hard credit check can lower your credit score by up to five points and can remain on your credit report for up to two years
- Multiple hard inquiries within a certain time period for a home or auto loan are generally counted as one inquiry
How Many Points Does a Hard Inquiry Affect Credit Score
As we said earlier, when a creditor pulls a hard credit check, it can negatively impact your score by as much as five points. For this reason, borrowers must be mindful when applying for loans. Applying for several loans in a short period of time can cause your credit score to nose dive and can make you look more like a credit risk.
However, depending on your approach to applying for a new loan or line of credit, you can get answers from multiple creditors without a significant hit. For example, if you apply for a loan through an aggregator, your information will be sent to multiple lenders to help you identify the best loan terms and interest rates for your needs. Though you will see a separate inquiry from each lender, you won’t be penalized similarly.
What Triggers a Hard Inquiry on Your Credit Report?
Credit inquiries occur because lenders want to check your credit report. A hard inquiry will take place for the following types of loan applications:
- Mortgage applications
- Auto loan applications
- Credit card applications
- Student loan applications
- Personal loan applications
- Apartment rental applications
Prospective borrowers should understand that credit reports are only valid for 120 days. So, if you apply for a loan, ensure you intend to follow through. If you don’t accept your loan terms and decide to do so several months later, the lender will need to check your credit again.
Earlier, we mentioned that applying for a loan through a loan aggregator can be less harmful to your credit score. This process is called rate shopping and essentially bunches your loan applications together so that multiple creditors receive the information and can determine if you meet their borrower criteria. So, you’re probably asking yourself how does it work?
- The VantageScore 3.0 counts all loan or credit inquiries within a 14-day period as only one inquiry on your credit report, provided all of the inquiries are for one specific type of loan, such as an automobile loan or mortgage.
- FICO treats multiple inquiries similarly, but the applications must occur within 45 days for it to count as only one inquiry.
All in all, hard inquiries fall under the “less influential” category when calculating credit scores using the VantageScore model, and they make up only 10% of a FICO score calculation.
How Many Credit Inquiries Are Too Many?
This is a tricky question and is difficult to answer. According to American Express, there is no such thing as too many inquiries. And having only one or two hard inquiries over a several-month period won’t affect your score much, especially if you have good or excellent credit.
That said, every time you apply for a loan, even when you bunch your applications together, it will cause the score to dip just a bit. The key here is to be thoughtful when deciding if you want to take out a loan. Do your homework by looking at the average rates and terms from lender to lender and narrowing down where you want to apply before doing so. And, unless you are early on in the planning process for a big project and want to understand long-term costs, don’t apply until you are ready to take on the responsibility for the new loan.
Soft vs. Hard Credit Check: What’s The Difference?
At this point, you understand that a hard credit check occurs at the time of the application. This is a common process anytime you apply for a mortgage, auto loan, credit card, student loan, or personal loan. Hard inquiries are also common if you are looking to sign a lease for an apartment rental.
- On the other hand, a soft inquiry provides visibility to your credit score and creditworthiness in the following situations.
- You want to check your own credit to know your score
- A current creditor checks your credit to determine if they should lower (or raise) your APR or offer you more (or less) credit
- You apply for a soft-pull preapproval with a creditor
- A company wants to determine your eligibility for a prequalification or preapproval offer
- You are applying for insurance
- You signed up for a credit monitoring service
How do Hard Inquiries Affect Your Credit Score?
Hard inquiries affect your credit score by about five points or less. This is because your debt-to-income ratio can increase when you apply for credit, making it more challenging for you to fulfill your minimum monthly payment. The more debt you take on, you have to pay monthly. Thus, a hard credit check is reflected on your credit report and impacts your score. Think of it as a signal to potential creditors that you are actively seeking new credit.
“The best way to protect your credit score from a hard credit check is by being mindful when applying for credit. If you don’t need a personal loan or a new credit line, then don’t apply. And if you need to apply, bundle your applications so that the hit to your credit score is as minimal as possible.”
How Long Does a Hard Inquiry Affect Your Credit Score?
Think of a hard inquiry as a timeline of when you have applied for new credit. It lets creditors know that you are considering (or have) new credit. Hard inquiries can remain on your credit report for up to two years. A hard credit check can indicate different things to different lenders depending on your unique credit history.
For this reason, always do the following to protect your credit score:
- Do your homework before applying for a new loan
- Shop around by bundling your applications to lessen the impact on your credit score
- Don’t apply for a new loan even if it is a personal loan for good credit if you don’t need one
- Keep your debt-to-income ratio below 48%
“Credit inquiries are only responsible for 10% of your credit score while your payment history makes up 35% of your score. So, don’t worry if you need to apply for a new loan every once and a while. As long as you don’t apply too often or for more than you can handle, and you make payments on time, the hit to your credit score will be negligible.”
How to Remove Hard Inquiry From Your Credit Report
It’s important to note that one or two hard credit checks here or there will not keep most borrowers from being able to borrow money. And, if you are mindful of when you apply for credit and don’t apply for more than you need, then you likely won’t feel the impact. Hard inquiries will drop off your credit report in one to two years.
All three credit bureaus, Experian, Equifax, and TransUnion, have a well-documented process for filing credit report disputes. So if you look at your credit report and see an inquiry you did not make, you should take action. The best thing to do in this situation is to file a dispute with the bureau by calling or mailing a letter.
Tips for Improving Your Credit Score After a Hard Inquiry
If you apply for a new loan or form of credit, your credit score will take a hit of about five points. In the grand scheme of things, this isn’t very significant and likely won’t hurt you long-term. However, take the following steps if you want to improve your credit score after a hard inquiry.
- Make your payments on time every month by paying at least the minimum amount due.
- Be mindful before applying for more credit. Unless you apply for a certain type of loan in batches, every application will lead to an additional hard credit check and ding to your credit.
- Catch up on any past due amounts for any other creditors (ideally, do this before you apply for a new loan or credit card)
- Let the inquiry run its course. The impact of the hard inquiry will roll off your score in one to two years. Remember, however, that your credit score can rise and lower monthly as creditors report on your credit activity to the bureaus.
If you are wondering how many points does a hard inquiry affect your credit score, the answer is up to five points. Unless you bundle your applications together, every time you apply for a new personal loan for fair credit, a credit card, or any type of credit line, the creditor will conduct a hard check, and your credit score will take a slight ding. A hard inquiry will remain on your credit report for up to two years, so be mindful when applying for new credit, and don’t take on debt that will put your debt-to-income ratio over 48%.