Credit inquiries are one of the important factors that can impact your credit score. In simple terms, a credit inquiry is a request made by a lender or a financial institution to access your credit report. This is done to evaluate your credit-worthiness before approving any credit application. While credit inquiries may seem like a routine part of the lending process, it’s important to understand how these inquiries can affect your credit score.
There are two types of credit inquiries – hard and soft inquiries. Hard inquiries are typically made by lenders when you apply for credit, such as a credit card or a loan. A hard inquiry gives lenders a detailed snapshot of your credit report, including your payment history, outstanding balances, and credit utilization. A hard inquiry stays on your credit report for up to two years and may have a negative impact on your score.
On the other hand, a soft inquiry is a background check that is done by credit monitoring services or by employers as part of a background check. Soft inquiries do not affect your credit score and are only visible to you when you check your credit report.
So, how exactly do credit inquiries impact your credit score? Each hard inquiry can reduce your credit score by a few points. Multiple credit inquiries within a short span of time can significantly lower your credit score, making it harder for you to get approved for credit. For example, if you’re trying to apply for multiple credit cards within a short span of time, this could be perceived as a sign of financial distress and cause lenders to view you as a high-risk borrower.
However, there are certain situations where multiple inquiries may not affect your credit score as much. For instance, if you’re shopping for a mortgage or car loan, multiple inquiries within a short span of time may be grouped together and counted as a single inquiry. This is known as rate shopping and is a common practice among borrowers looking for the best interest rates.
In conclusion, credit inquiries are an important aspect of managing your credit score. It’s important to be aware of the types of inquiries that can impact your score and to limit the number of hard inquiries you have. You can also check your credit report regularly to make sure there are no unauthorized credit inquiries on your account. Understanding how credit inquiries impact your credit score can help you make informed decisions when applying for credit and managing your finances.