Everyone knows how vital your credit score is — from getting approved for a credit card to getting lower interest rates on loans, it’s important to keep your credit score up so you can get the best credit offers. Even if you don’t need to access that credit right now, you should be prepared for when an emergency arises and you could actually use some extra funds. While monitoring your credit score helps you know where you currently stand and how you’re improving over time, some types of inquiries can actually cause damage. Learn the differences between each type of credit check so you can keep your credit score as high as possible.
What’s the difference between hard inquiries and soft inquiries?
A credit inquiry happens when any lender or other third party requests a copy of your credit report from one of the three major credit bureaus: Experian, Equifax, or TransUnion. They can then use the information on your report to generate customized credit offers, confirm your personal information, and more. Exactly who can access your credit report is regulated by the Fair Credit Reporting Act (FCRA). You can also authorize others to view your credit report if you wish.
There are two different types of inquiries: hard and soft. The difference comes from who exactly is accessing your report and why. Typically any type of application for credit you make will result in a hard inquiry. This can include credit card, personal loan, mortgage, and car loan applications. Collection agencies may also access your credit report to try and find your location, resulting in a hard inquiry.
Soft inquiries, on the other hand, typically occur as part of a background check rather than a full credit analysis. One of the most common reasons behind a soft inquiry is when you apply for a pre-approval from a creditor in order to get a rate quote. However, soft inquiries can also be performed even if you aren’t applying for any type of credit. For example, they can be used as part of the screening process for potential landlords and employers. Insurance companies, utility companies, and cellphone providers, for example, may also check your credit, but since those accounts don’t result in accumulating new debt, they’re considered soft inquiries. Finally, accessing your own credit report only counts as a soft inquiry.
Potential creditors can perform soft inquiries to help tailor customized credit offers for you based on your credit profile. That’s how you end up with pre-approval offers in the mail for credit cards, personal loans, and refinancing. If you don’t want those creditors accessing your information and filling your mailbox with junk mail, you can opt out by visiting OptOutPrescreen.com.
How do inquiries affect your credit score?
Hard inquiries impact your credit score in a few different ways. First, all hard inquiries from the last two years are individually listed in a section towards the end of your credit report. Each one causes a slight dip in your credit score, though usually no more than five points or so. Luckily, the damage only lasts for a year even though an inquiry won’t drop off from the list until it reaches the 24-month mark.
Recently, credit scoring models have changed to accommodate consumers’ tendencies to shop around for offers. So, for example, if you’ve made several car loan inquiries within a short time period — usually within 30 to 45 days — they will only count as a single hard inquiry when your credit score is calculated. Lenders still see each individual inquiry but this typically doesn’t cause alarm since it appears you’ve simply been shopping around for the best rates.
Too many credit card inquiries, however, can raise a red flag when a potential lender is reviewing your credit report during the application process. This is true for a couple of different reasons. First, these inquiries aren’t usually lumped together as part of rate shopping. The other worrisome part for lenders is that it can take time for a new line of credit to show up on your credit report. Since a credit card is much easier to get approved for compared to a loan, a lender might not feel confident that all of your current accounts and balances are listed on the copy of your report. You could potentially have new credit cards and outstanding balances, making the lender’s debt to income ratio calculations inaccurate. There’s just no way for them to know, so it’s ideal to stop applying for credit cards well before you need to apply for other types of loans.
The good news is that soft inquiries don’t have any effect on your credit score at all. That’s why shopping for credit through pre-approvals is a safe way to find the best rates and terms because you can check as many lenders as you’d like without hurting your credit. Soft inquiries aren’t listed anywhere on your credit report and future potential lenders can’t use that information when evaluating your application.
Can you dispute a hard inquiry?
Yes, hard inquiries can be disputed if you think one or more have been inaccurately listed on your credit report. According to the FCRA, creditors must receive your authorization before conducting a hard inquiry. If you’re considering disputing any inquiries, start off by checking all three credit bureaus. Not all creditors report to all three bureaus, so the information could be listed differently on each one. Plus, each credit bureau has it’s own dispute process; successfully disputing an inquiry on one report will have no effect on the other two.
If you don’t recognize one or more of the inquiries listed on your credit reports, start by contacting the creditor directly. It’s best to write a formal letter and request a return receipt via certified mail so that you can keep comprehensive records and time the company’s responsiveness. They are required by law to provide proof that you authorized the inquiry through a credit card application or some other type of documentation. If they can’t, they must instruct the credit bureau to remove the inquiry from your credit report. Oftentimes, the credit card company may just remove it rather than going through the hassle of digging up old paperwork. In case you have difficulty working with the credit card company, you can also file a dispute directly with the credit bureau.
When deciding whether or not to dispute hard inquiries, take a look at your broader credit picture. In the long run, it may not be worth your time if you only expect to get one or two inquiries removed; after all, that will probably only result in an increase of a few points. If you have major negative items on your credit report, your time may be better spent concentrating on getting some of those removed. Still, you might want to remove inaccurate hard inquiries if you are about to apply for a major loan and want your credit report as clean as possible. Then you don’t have to worry about your lender analyzing why you have so many inquiries listed over the last two years.
How can you safely monitor your credit score?
When you’re trying to raise your credit score, it’s important to check it regularly to see which of your financial behaviors are having a positive impact and which ones might be causing damage. Checking your own credit report doesn’t impact your score and neither does signing up for a credit monitoring service. Not only can you get regular updates on your progress, you can also feel safe knowing that you’ll quickly be able to detect any potential identity theft or fraud.
There are countless services offering credit monitoring, and the best fit for you depends on your credit goals. Do you want help tracking your credit score? Do you just want to be alerted to any new or suspicious credit activity linked to you? For a comprehensive list of the best credit monitoring services available, check out our reviews here. If you’re simply interested in getting your credit score on a regular basis, ask your bank or credit card company if they offer a free credit check service. Oftentimes, you might get access to your score each month as part of your member benefits.
Understanding how credit inquiries work can save you a lot of grief and aggravation when it comes time to apply for new credit. Check your credit reports at least once a year to make sure you stay on top of any inaccuracies or errors, then follow up with any incorrect information you find. By keeping your credit report — and consequently, your credit score — clean and up to date, you’ll have an easy time the next time you need to get a loan or new credit card.