If you’ve applied for credit in the past, you've probably heard the terms "hard inquiry" or "hard pull." But what exactly is a hard inquiry, and how does it affect your credit score?
The difference between hard and soft credit inquiries and how they can affect your FICO® Credit Score
First things first, what’s a credit score?
A credit score is a three digit number that tells lenders how likely a candidate is to repay borrowed money. The number ranges between 350 and 850 and is calculated based on the following factors:
- Payment History. This accounts for 35% of your credit score. This shows lenders if you pay your credit accounts on time or not. It will also show missed payments and bankruptcy details.
- Accounts Owed. This accounts for 30% of your credit score. This refers to the amount of money you owe. This number is considered in relation to how much credit you have available to you (your credit utilization ratio). The lower your debt to credit ratio is, the higher your score will be.
- Length of Credit History. This accounts for 15% of your credit score. The longer you have had credit, the higher your score will be.
- Credit Mix. This accounts for 10% of your credit score. You will need a good mix of retail accounts such as credit cards, loans, and mortgages for a good score.
- New Credit. This accounts to 10% of your credit score. If you open a bunch of new accounts, you will be flagged for a lower score.
Is a FICO® score the same as a credit score?
FICO is essentially a brand of credit score. FICO is a software analytics company that produces the most widely used software for calculating credit scores. Almost 90% of credit decisions are made using FICO scores. So ultimately yes, your FICO score is your credit score.
What’s the difference between a soft inquiry and a hard inquiry?
A soft inquiry, also called a soft pull, is a preliminary credit check. These credit checks are unrelated to direct lending decisions. These pulls can be done with or without a consumer’s consent. Some examples of soft inquiries include:
- A consumer checking their own credit score.
- A credit card company looking to pre-approve applicants.
- A background check performed by a potential employer.
- An insurance company looking to pre-approve quotes.
Soft inquiries do not affect credit scores at all, they only provide preliminary information for those inquiring.
A hard inquiry, also called a hard pull, is a formal credit check. Hard inquiries are done when consumers are actively seeking new lines of credit. These credit checks usually need to be authorized by the consumer. Lenders will make hard inquiries when you are:
- Applying for a mortgage.
- Applying for a car loan.
- Applying for a new credit card.
- Applying for a new apartment.
- Applying for a credit limit increase.
Some utility companies will also perform hard or soft inquiries. If you are unsure what a pull will be classified as, be sure to ask these companies when you reach out to open these accounts.
How do hard inquiries affect credit scores?
The more hard inquiries you have in a short amount of time, the more of an effect the hard inquiries will have on your credit score. One hard pull may not affect your score at all, and if it does it will likely not drop your score by more than ten points. The risk comes when you open multiple new accounts. You are then affecting the “New Credit” and “Length of Credit” categories on your credit score, which together account for 25% of your score.
How many hard credit inquiries is too many?
This depends largely on your overall credit health and history. One or two hard inquiries will not make a big difference if you have a good credit score, but more than that and you risk dropping your score by 20 points or more.
Does applying to refinance trigger a hard inquiry?
Applying to refinance your mortgage or vehicle will trigger a hard inquiry. Since you are applying for a new line of credit that will buy out your old line of credit, lenders need to see a full and detailed credit report. Condensing your refinancing shopping time to a window of two weeks will help minimize damage, this way multiple hard inquiries for auto loans will count as one hard inquiry. (Thinking of refinancing your auto loan? Contact Auto Approve today to see how we can help!)
How do you dispute a hard credit inquiry?
Experts recommend checking your credit score three times per year. There are three major credit agencies, Equifax, Experian, and TransUnion, and each of these allow you to pull your report for free once per year. Take advantage of this and strategically check your report throughout the year. If you notice there are hard inquiries that you did not authorize, contact the credit agency directly. This could be a sign of identity theft, and if that’s the case you want to take action early to minimize damage. Even if it’s not identity theft, you want to clear up any errors to make sure your credit report is accurate. Before you file a dispute however, do your research to make sure it’s not valid. Sometimes credit checks come from lenders that we might not recognize.
How long do hard credit inquiries stay on your credit report?
Hard inquiries are calculated into your credit score for one year, but the inquiries remain on your report for two years. In other words, after one year they really do not affect your score.
How do you minimize the effect of hard inquiries on your credit score?
The most important thing you can do when shopping around for a loan is to condense your search time. Credit bureaus give a two week period for inquiries to be made. If you apply for multiple loans in this period, the credit agency will consider them as one hard inquiry. This is the most important thing you can do to minimize damage from multiple hard inquiries.
In general, experts caution you to be aware of hard inquiries, but they stress that this part of your credit report is the least impactful. Missed payments and high credit balances are much more detrimental than new credit inquiries.
And that’s everything you need to know about hard inquiries, soft inquiries, and their effect on your FICO® credit score.
We hope this answered your questions about how credit inquiries affect your credit scores. If you're thinking about refinancing your vehicle to a lower interest rate to save money, Auto Approve can help! Contact us today to get a quote – and don’t worry, quotes count as soft inquiries!