Hard Inquiries: Everything You Need To Know
Whether you’ve unwittingly launched a hard inquiry or are wrapping your head around the loan approval process, understanding what a hard inquiry is, how it impacts your credit score, and when it’s appropriate to authorize is key to your financial health.
Hard inquiries themselves aren’t necessarily deemed "bad" or "good," but should only be utilized when the timing is right and the reward is greater than the risk. For example, when the reward is kicking up your feet on a brand new outdoor deck and the serenity that more outdoor time provides, the risk may be relatively small for you.
Let’s take a look at what you can expect from your first hard inquiry.
What Is A Hard Credit Inquiry?
A hard inquiry happens when you apply for a loan or credit card, giving the lender permission to review your credit report from one or more of the three major credit bureaus: Experian™, TransUnion® and Equifax®. Hard inquiries make up 10% of your credit score and can hurt your credit score by up to 10 points, regardless of whether you get the loan.
That said, credit bureaus view multiple hard pulls within a period of 14 – 45 days as one inquiry if you’re simply shopping around for best offers on a mortgage or auto loan. You’ll want to be certain you’re ready to take out a loan when you apply, or risk hurting your chances for a better offer later down the road.
Understanding The Difference: Hard Inquiries Vs. Soft Inquiries
Reviewing your own credit score – what’s called a "soft inquiry" – won’t hurt your credit at all. In fact, it’s a good financial health practice to check your credit report at least once a year to contest any errors, fraud or identity theft. Examples of what prompts a soft inquiry include when:
- You check your own credit score.
- Your current creditor checks your credit.
- Another creditor checks your credit for promotional offers.
- You apply to get preapproved for a loan.
- A new employer pulls your report before finalizing a job offer.
- You open a bank account, in some cases.
- You rent an apartment that requires a credit check, in some cases.
According to Experian™, you can have hundreds of soft inquiries and they won’t damage your credit whatsoever. Think of soft inquiries as informational, and hard inquiries as actionable. Hard inquiries indicate you’re about to take on some debt. Examples of hard inquiries include when you:
- Apply for a credit card.
- Apply for a loan (i.e. auto loan, mortgage, personal loan, etc.).
- Apply to lease a vehicle.
- Respond to a preapproved credit card offer.
- Request a credit limit increase from your creditor.
In short, soft inquiries keep you informed of your financial health, while hard inquiries can impact your financial future—for better or worse.
How Hard Inquiries Are Used
Let’s say you and your partner want to buy an Airstream together. Caught up in the fantasy of living in campgrounds around the country, you decide to apply for an RV loan to see how much wide-open space you can afford. At this point, you’ve initiated a hard inquiry. The lender is going to request to view your credit report to determine the interest rate and loan amount they predict they can offer you.
This hard inquiry will cost you a few credit points, but not nearly as much as the final act of taking out a loan for a mobile home. After considering it, you two have decided the impulse was actually just the result of cabin fever after a few months of quarantine. You pause and, instead, decide to make a budget and add more landscaping, a deck and grill area to your long-overlooked yard.
Picture this: The year is 2022. The pandemic is over. Your dedication has paid off and you decide to take out a home improvement personal loan to cover the remaining costs of your backyard oasis. As you’re getting preapproved and rate-shopping, you notice the fine print in your credit report stating you have three inquiries on your credit report: your auto loan, new credit card and an RV financer.
While the hazy memory of quarantine-spun dreams may feel like a lifetime ago, that hard inquiry will stay on your report for another year. By now, your credit score has had the opportunity to bounce back, and you wonder what a lender will think of that inquiry.
How Lenders View Hard Inquiries
Lenders don’t view hard inquiries as inherently bad. Inquiries into new lines of credit can be proven, with time, to be a smart financial decision (i.e. purchasing a home, growing a business, consolidating debt, continuing education, etc.). However, if a lender sees several hard inquiries with a rising debt-to-income ratio, they may make the calculated decision to decline your loan request.
While a lender won’t have the same context that you have about that Airstream-shaped light at the end of a pandemic tunnel, they are able to derive some contextual information. For example, if they see a borrower has applied for several credit cards within a short period of time, that will be less favorable than if you applied for several student loans at the same time. Lenders can infer when you’re just rate shopping as well as when you’re in a possible financial pinch.
How To Prepare Your Credit Score Before A Hard Inquiry
Still, hard inquiries are one of the least important factors that lenders consider when determining your creditworthiness. When it comes to building credit, making on-time payments on your auto loans, credit cards and other bills will have the highest positive impact on your score.
Maintaining a low balance on your credit card can also boost your credit score. The more reliably you pay off and ward off debt, the more likely lenders will loan you money. They know that you’ll prioritize paying them back.
Remember, it takes time to build up your credit score. Online lenders are fairly transparent about their interest rates relative to credit scores. If you’re on the fence between two brackets, give yourself at least 6 months to boost your score. With consistency and time, your credit points are a renewable source of financial leverage.
When To Expect After A Hard Credit Pull
The whole purpose of a hard credit inquiry is to unlock your quoted rates. As fun as it is to dream scroll through warm-lit backyard decks complete with a flush hot tub, your vision can only come into focus when you’re handed a budget. Enjoy the moment.
The worst case scenario is that you’re not quite satisfied with the rates and terms you’ve been offered. Your score will drop a few points, but not for too long. You’ll work toward building your credit above 700 points over the next year and try again.
The best case scenario is that you’ll get approved, receive the loan amount requested and begin your home improvement project. Your credit score will take a hit for such a large loan amount, but you’re not planning on making any other big purchases anyway. You and your partner survived a pandemic, and the impulse to live with a jostling, composting toilet – and you’re enjoying the great outdoors in your very own home. Life is good.
What Is A Hard Credit Pull?
You may be wondering what the difference is between a hard inquiry and a hard credit pull. Both the short and long answer is: There is no difference. The phrases are used interchangeably to refer to the same type of credit inquiry from an external source.
How Long Do Hard Inquiries Stay On Your Credit Report?
Hard inquiries can stay on your credit report for up to 2 years, though your credit score should bounce back within a year. Lenders find your history of hard pulls valuable to better understand your creditworthiness and how often you’ve tried to take out a line of credit.
How Do I Remove A Hard Inquiry?
Unfortunately, there’s nothing you can do to remove a hard inquiry from your credit report besides wait. While a hard inquiry will disappear entirely after 2 years, the impact on your credit score will be wiped after just 1 year. It should be noted that there’s plenty you can do during that time to improve your credit score.
Before you apply for a loan or new line of credit, it’s wise to make a soft inquiry on your credit to understand your financial options and contest any errors in your report. You may find that you’re just a couple months away from the 2-year mark on a hard inquiry and may benefit from waiting a little longer before applying for a loan.
Be sure you’re only applying for loans as needed to prevent too many hard inquiries from appearing on your credit profile and damaging your credibility. Once you’re ready to apply for a loan, do all your rate shopping within a 30-day period to ensure the credit bureaus view the external hard pulls as a single hard inquiry.
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