If you have applied for a loan or a credit card and the lender or bank has scanned your credit scores in the process, you have likely encountered what is called a hard credit inquiry.
When lenders conduct a hard inquiry, it means they are going through a formal assessment of your credit reports. The information included in your credit report is used by the lenders to evaluate your credit history, including your payment punctuality, management of debts and bills, and the presence of any red flags on your credit reports.
Additionally, with hard credit inquiries lenders try to get insights into the extent of credit you are handling and the duration of your credit management. All these factors play a crucial role in the lender’s decision-making process whether to grant you new credit or extend additional credit.
To be prepared for a hard credit inquiry, you should monitor your credit reports regularly. Checking your credit score online often involves a soft credit inquiry. Let’s first understand the difference between hard credit inquiry and soft credit inquiry:
What is a hard inquiry?
Hard credit inquiry generally occurs when a lender or a credit card issuer, examines your credit during the lending decision-making process. These inquiries commonly happen when you apply for a mortgage, loan, or credit card, and your authorization is required.
While a single hard inquiry might have a minor impact on your scores, it’s unlikely to affect approval of your new card or loan. However, applying for multiple loans or credit cards simultaneously or within a short timeframe may lower your credit score significantly. Several hard inquiries in quick succession might lead lenders to view you as a higher-risk borrower.
What’s the impact of a hard credit inquiry?
The impact of hard inquiry on your credit score depends on your overall credit health. Adding one or two hard inquiries might cause a slight drop in your credit score, on the other hand, multiple hard credit inquiries within a brief period could have a more pronounced impact, as it may signal a higher risk to lenders. However, if you maintain a responsible financial behavior by paying your EMIs or dues on time, you can actually build a good credit score by having a variety of loans and credit cards.
What is a soft inquiry?
Soft credit inquiry usually occurs when an individual or company checks your credit for background purposes. Unlike hard inquiries, soft inquiries do not affect your credit score, although their recording in credit reports may vary among credit bureaus. Soft inquiries are not related to any specific loan or credit card applications, hence, remain visible only to you when you access your credit reports.
Hard inquiry vs soft inquiry: Common examples
|Common hard inquiries||Common soft inquiries|
|Mortgage applications||Checking your credit score|
|Auto loan applications||Pre-qualified credit card offers|
|Credit card applications||Pre-qualified insurance quotes|
|Student loan applications||Employment verification|
|Personal loan applications||Background check|
How to minimize the impact of hard credit inquiries?
If you are planning to apply for a home loan or a car loan, don’t let the fear of multiple hard inquiries deter you from seeking the best loan interest rate. The fact is multiple credit inquiries for the same type of loans made within a specific window, usually around two weeks, may be treated as a single inquiry.