Loan application processing comes with a series of steps. Inquiring on your Credit is one such step that needs to be adhered to. Credit Inquiry can happen either ways. When you want to find out your own credit standing with the credit bureau. This amounts to “Soft Inquiry”. Lenders go in for an inquiry on your credit history with the credit bureaus before granting you a loan. This process on inquiring on your credit history is known as “Hard Inquiry”.
What Is a Credit Inquiry?
A credit inquiry can be referred to as a request posted by a financial institution or firm for the credit information of an individual or an entity. This credit information is pulled out of your credit report lying with the credit bureaus. The credit report will give the lenders a detailed history on the already existing debt obligations and payment history made so far. It will not be lesser to say that your credit inquiry is the first step towards credit approvals.
Difference Between Hard Inquiry and Soft Inquiry
Credit Inquiries are of two types. These credit inquiries happen by the lenders or
The following table enlists in detail the difference between hard inquiry and soft inquiry in detail. They are:
Comparison Criteria | Hard Inquiry | Soft Inquiry |
Credit Score | Gets affected. Temporarily lowering your score by a few points | It does not affect your credit score |
Consent of Credit Inquiry | Required | Not Required |
| Timing of Credit Inquiry | Done at the time of granting loans or credit cards | Done during a pre-approved loan offer |
| Appearance on Your Credit Report | Yes. Appears on the Credit Report | No. Not Necessarily |
| Purpose | Done when applying for credit | Done for background checks |
| Consent Required | Yes. Your permission is needed | No explicit permission required |
| Visible to Lenders | Visible to Banks or NBFCs. Affects the evaluation | Visible. But ignored in loan evaluation |
| Impact | Too many hard Inquiries will pull down credit score | Unlimited soft Inquiries, no negative effect |
Reason to Undergo | To assess your credit worthiness to grant loans or credit cards | To provide pre-approved offers, or to check your own score |
Initiated By | Lenders | You, Lenders, Employers, and Credit Bureaus |
What is a Hard Inquiry?
A hard Inquiry is requested by a lender when you have applied for a loan or credit card. Hard Inquiries are in the form of credit reports that enlists in detail your credit score and credit history. This hard Inquiry helps the lenders to evaluate how responsible you are in handling credit. Hard Inquiries are initiated by the lenders after getting the requisite consent from you.
It is good practice not to initiate hard Inquiries as they remain in your credit report for almost two years. Moreover these hard Inquiries might temporarily pull down your credit score as well. So go in for a loan or credit card only when you need the most.
A credit report having several hard Inquiries within a short span of time ultimately results in a low credit score. Too many hard Inquiries can also depict you as a credit hungry person. This will project you negatively to the lenders who might avoid giving you credit. If at all they give, they might give it at a higher rate of interest with unfavorable terms and condition.
What is a Soft Inquiry?
A soft inquiry can be done for various requirements. These soft inquiry are not recorded on your credit report. There are many banks or NBFCs conduct a soft inquiry on prospective customers to given them pre-approved loans or credit cards. In the same manner, borrowers can also do a soft inquiry their credit reports for any discrepancies or just to find whether their credit score is good to obtain a line of credit. Individuals can also look into their free annual credit report from credit bureaus.
How Hard Inquiries Affect Loan Approval
Hard inquiries can affect your loan approval chances and cause a dip in your credit score. This also raises a red flag with the lenders if they occur within a short span of time. Some of the potential effects of a hard inquiry includes:
- Temporary Credit Score Downfall: Your credit score is likely to drop after every hard inquiry made on your credit report.
- Loan Application Rejections: Too many hard inquiries within a short span of time does not go well with the lenders. This might potentially lead to loan application rejections.
- Signals Financial Stress: Multiple hard inquiries depicts that you are a credit hungry persona, the lenders will lose their faith in you as they would not like to take risk with regard to repayments.
- Visibility on Your Credit Report: Most of the hard inquiries made will remain in your credit report for a longer period of time. But their potential damage can be reduced by following a series of good credit habits over a period of time.
How to Reduce the Impact of Hard Inquiries on Credit Score
Hard Inquiries can sometimes be very hard on you and your credit report as well. But you can always reduce the impact of the hard Inquiries on your credit score. Please adopt the following proven strategies to avoid the impact of hard inquiries. They are:
Limit Applications: Limit the number of credit applications within a short span of time. This might signal financial distress in the eyes of the lenders.
Research Before Applying: Do a complete research on the loan or the credit card before applying. Check whether you satisfy the eligibility criteria that is been set for the credit card or the loan. You can also go in for pre-approved offers that might help you to avoid hard inquiry.
Monitor Your Credit Report Regularly: You can always monitor your credit report on a regular basis. This way you can catch any discrepancies and contest on the same with the credit bureaus.
Maintain some timeline Between Applications: When you have a healthy gap of 6 months between two credit applications, this will minimize the effect of a hard Inquiry pull.
Maintain a Strong Credit History: A high credit score and a strong repayment history reduce the negative impact of the hard Inquiries.
Does Checking Your Own Credit Score Hurt Your Credit?
No. Checking your own credit will not hurt your credit score. Checking your own credit score amounts to a soft inquiry. This is in total contrast with a hard inquiry done on your credit report. When you regularly check your credit report and credit score, it will be easy to catch errors, monitor your credit score, and identify any fraudulent transactions.
Conclusion
In order to maintain a healthy credit profile, it is essential to manage credit inquiries effectively. These credit inquiries are important to check your credit worthiness and your long-standing behavior in handling credit. But excessive hard Inquires within a short span of time can reduce your credit score. It is a good practice to limit the number of inquiries by choosing your credit applications. Limiting the number of inquiries will increase your chances of getting credit at better terms and conditions and maintain a strong credit profile.
FAQs
1. How do hard inquiries affect my credit score?
Hard inquiries do affect your credit score slightly as you are seeking new credit. And when there are multiple credit applications within a short span of time, might depict you as a credit hungry person. The hard inquiries stays on your credit report for a longer period of time.
2. Does soft Inquiries affect your credit score?
Yes. Soft Inquiries does not affect your credit score as this inquiry is been raised by you to find out your credit worthiness before applying a credit or with preapproved offers.
3. Will I see my hard Inquiries and soft inquiries on my credit report?
Yes. You can see both your hard inquiries and soft inquiries on your credit report. Most of the credit bureaus report this information and you are entitled for a free credit report in a year from each of the bureaus.
4. Will the lenders see my soft inquiries?
No. Lenders will only be seeing your hard inquiries on your credit report. They will get the list of credit inquiries made on your name.
5. How long does a hard inquiry affect your credit score?
A hard inquiry affects your credit score for a short duration even though it stays in youre credit report for a longer period of time. Your credit score dropd by 3 to 10 points right after a hard inquiry is recorded.
6. How many points does a soft inquiry affect credit score?
A soft inquiry happens when you check your own credit score or when a lender checks your credit report for approving a pre-approved offer. Soft inquiry reduced your credit score by 0 points.