Understanding Hard Inquiries and Their Impact on Your Credit Score

Before granting any loan, lenders and creditors usually check a borrower’s credit score. A credit score is usually between 300 and 900 and indicates how likely an individual will pay their credit bill or debt on time. Having a high credit score increases one’s chances of getting approved for a loan or credit. A hard inquiry is when one applies for a personal loan or credit card and the lender requests for their credit history.

This blog will help you understand more about hard inquiries and how they impact one’s credit score.

What is a Hard Inquiry?

Hard inquiry is a request to check one’s credit history. It is undertaken when someone applies for a home loan, credit card, education loan or a personal loan. The objective of a hard inquiry is to check and review the borrower’s credit report and gauge their creditworthiness. It requires the individual’s consent. A hard inquiry remains on record for two years. But hard inquiries on credit score affect for one year.

Hard Inquiry Process: How Does It Occur?

Whenever an individual applies for a loan or credit card, the lender requests for credit history to assess that individual for risk. This request is known as a hard inquiry. Hard enquiry is done when one applies for a loan like home loan, education loan or personal loan or when applying for a credit card. Each hard inquiry on credit score affects and takes it down a few points. If one has a good credit score, a few points won’t have much impact on the person’s credit score. However, if one has a bad credit score or limited credit history, few hard inquiries can significantly affect their credit score.

How Does a Hard Inquiry Affect Your Credit Score?

Hard inquiry on one’s credit score can affect badly and a single hard inquiry can even bring down the score by 10 points. Credit bureaus consider the timeline in which inquiries happen. If you are checking multiple lenders for the same type of loan in a short span (usually 14-45 days), they are generally treated as a single inquiry. A hard inquiry may lead to a dip in credit score but it is temporary. Practise good credit habits to maintain a good credit score. Think it through before applying for any loan or credit. Assess your options and then apply to the few that best fulfil your financial requirement.

Also Read: What is Credit Rating: Know Its Importance, Types & Benefits

Difference Between Hard and Soft Inquiries 

Examples of Hard Inquiries

Hard inquiries are done by a lender, usually a financial institution or a credit lender. It is done to assess the borrower by checking their credit history before approving their loan or credit. Few examples of hard inquiries include:

• Applying for a home loan, education loan, personal loan or car loan
• Applying for a new credit card
• Apartment rental applications
• Application for utility services
• Collection agencies, if multiple payments are missed by borrowers

Impact of Multiple Hard Inquiries on Your Credit Score

Multiple hard inquiries happen when one applies to multiple lenders simultaneously. This significantly impacts credit score, taking it down by 10 points or more. An individual comparing lenders and interest rates for a home loan or education loan is likely to apply to multiple lenders. Credit bureaus understand that and usually provide a 14-45-day window. They consider these applications under a single inquiry.

However, if one applies for multiple credit cards, each application will lead to a hard inquiry. This leads to multiple hard inquiries and significantly affects credit score. This is a cause for concern for individuals with low or limited credit history. Thus, research on the lender before application and only apply for credit when needed. 

Tips to Minimize the Impact of Hard Inquiries

It is important to maintain a good credit score. Hard inquiries impact the credit score and can affect negatively if one has a bad credit score or limited credit history. Consider the mentioned tips to minimise the impact of hard inquiries:

Regular Credit Report Checks: Keep regular check of your credit reports. Report any unauthorized inquiries immediately to the credit bureau.

Multiple Credit Applications Simultaneously: Research and compare lenders, before applying for any credit. Avoid applying to too many credit cards or loans in a short time.

Maintain a Good Credit Score: Building a good credit history will reflect a high credit score. Repay credit bills and debt dues on time.

Timely Payments: Pay EMIs on time to maintain and build a good credit score

How Long Do Hard Inquiries Stay on Your Credit Report?

Hard inquiries stay on the credit report for 2 years. However, it only affects the credit score for up to a year. Credit bureaus typically consider the last 12 months of credit history when giving a credit score. Whenever there is a hard inquiry on a credit report, it takes the credit score down by a few points. The impact is even less if one has a good credit score. 

Thus, it is a good practice to check your credit score every few months to track your credit history and avoid all the factors that may lead to hard inquiries. Checking one’s credit score is a soft inquiry and has no impact on credit score.

Also Read: Zero or Negative Credit Score: What It Means and Its Impact

Conclusion

Regular credit checks are important and help one keep track of their credit history. Taking any type of loan or credit card should be an informed decision. A thorough research and comparison should be done before applying for any loan or credit. If you are looking for home loans or personal loans online, consider applying them in a short duration to group them as a single inquiry. Paying credit bills on time and clearing any previous debts, will ensure a good credit history and high credit score.