Hard Inquiry vs. Soft Inquiry 101 - Types Of Inquiries

In some of the previous sections, we have talked about you checking your credit score and credit report. You may already know this action has no effect on your score whatsoever.

In this section, we are going to go deeper into the details of Soft Inquiries and Hard Inquiries.

When you yourself or a potential lender asks credit bureaus for your credit report, it generates an Inquiry. According to the type of Inquiry, your credit score won’t or will be affected.

There are two types of inquiries:

• Hard Inquiry: A hard inquiry takes place when a lender with whom you have applied for some form of credit decides to ask for your credit report. They do this so as to gauge your creditworthiness. This type of inquiry brings down your credit score (damn it!), but it’s temporary.
  
  
• Soft Inquiry: A soft inquiry is when you ask the credit bureaus to check your credit score. It also includes instances of credit card companies and lenders checking your score in order to pre-order you for their offer. The best thing about soft inquiries is that they do not affect your credit score at all!

Now, it is just the proverbial tip of the iceberg. There’s much more to know about hard and soft inquiries.

Hard Inquiries

When you apply for loans or credit such as an auto loan, mortgage or credit card, the lender of those financial instruments checks your credit report for the score. The lender approaches any one of the credit bureaus for this. Since these practically are actual credit applications, these are considered to be hard inquiries. As such, your credit score is affected adversely.

How do Hard Inquiries affect your scores?

When there are too many hard inquiries for your credit score within a short span of time, your credit score slides down faster than you can imagine.

This is because a lot of hard inquiries in a short time makes potential lenders sit up and take notice. It upsets them. Too many hard inquiries adds to multiple new credit accounts. Opening so many new credit accounts in a short span of time only shows you are having problems in paying bills and require new loans to stay afloat.

Therefore, hard inquiries are bad for your credit score as no one likes giving loans to those who are in perpetual need, no matter how much it helps their cause.

There is a silver lining to this dark cloud though. Credit bureaus consider the possibility you were just rate-shopping, and not actually applying for loans. Thus in this case, multiple inquiries about a particular kind of product like home loans are considered to be a single inquiry. Thus, this has only a small effect on your precious credit score.

However, do remember inquiries are not the only reason you can be denied credit. In fact, that rarely happens. Criteria like payment history, credit mix, credit utilization ratio and types of credit are even more important.

How long do inquiries affect your credit report?

The bad news first: hard inquiries stay on on credit report for more than 2 years.

Now for the good news: Their impact on your credit score decreases over time.

Don’t worry even if you have several hard inquiries just within a few months. For a potential lender, on-time payments and low credit utilization ratio are more important than your number of hard inquiries.

While you yourself can remove hard inquiries from your credit report, it is possible only if a company pulls your credit in error, or has done it without your permission. In such cases, you need to ask the credit bureau to remove this instance from your report file.
All about Soft Inquiries

A Soft Inquiry is developed when:

• You check your own credit score and report.
• You give permission to outside agencies like potential employers to check your credit report.
• Lenders, credit card companies, insurance companies and others check your credit report to give you a pre-approved loan.
  

Who can see your report’s Soft Inquiries?

Normally, only you can do so. However, there are exceptions.

Others who can view it are:

• Insurance companies who can see the inquiries of other insurance companies
• Debt settlement companies who are authorized by you to view your report, that will also be shared with your current creditors
  

Soft Inquiries simply have no effect on your credit score. These are only for future reference and cannot be disputed.

Only a few outsiders, and only those who have your permission, can view your soft inquiries. These are not taken into account when calculating your credit score.

Now that we have learned both about Hard Inquiries and Soft Inquiries, let us learn about:

How to manage the Hard Inquiries as to salvage your credit score:

• Apply for loans only when you really need it
  
  
• Try removing the dispute by a certified letter, addressed to the credit bureaus. Explain why you want to dispute the inquiry, the name of the company than initiated the Hard Inquiry without your permission, and that you want it to be removed. Include your updated credit report and highlight those items you are disputing. State the reasons clearly.
  
  
• If you don’t want to write such a formal letter, you may just want time to do its work. Hard Inquiries are not permanent. They may take a few years, but fall off your credit score in time.

The Difference between Hard and Soft Inquiries

Let's say you are a strict and disciplined spender and you work really hard to maintain a five-star credit score. In order to build your credit, you wanted to take another credit card; however, your search for economically viable credit cards led to several hard inquiries and your superb credit score took a blow. Won't you be annoyed? Well, I certainly would.

A hard inquiry is that irritating factor which affects your credit score for almost no fault of yours. And then there are soft inquiries too. It's important that you understand the difference between the two. Why don't you read this article to find out more about these two types of credit inquiries?

What is a Hard Inquiry?

Hard inquiries take place when a lender or a credit card issuer conducts a check on your credit while making a lending decision. These inquiries generally take place when you apply for a new line of credit. Typically, a hard inquiry cannot be processed without your authorization.

A hard inquiry appears on your credit report. It reduces your credit score by a few points. It is an important decision-making factor for potential lenders. A single hard inquiry might not be very appalling, but a bunch of simultaneous hard inquiries can be serious. The credit score damage from a hard inquiry can be revived within a short span, but the data stays on your credit report for a few years.

How Do Hard Inquiries Impact Your Credit Score?

Too many hard inquiries at a time will not only reduce your credit score but will also make you seem too desperate for cash. Lenders will not be able to trust you. Multiple hard inquiries might add up to multiple new accounts. Opening numerous credit accounts at a time indicates that you are struggling to pay your bills or you are probably overspending. Hence, you are not worthy of getting credit anymore. That is primarily the reason why a hard inquiry affects your credit score.

However, most of the credit scoring models are more considerate than you think. They consider multiple hard inquiries for the same product within a short period as a possibility that you are looking for the best loan deal available. They would treat them as a single hard inquiry. In such a scenario, you need not worry much about your credit damage.

What are the Common Hard Inquiries?

A hard inquiry is conducted by the respective issuing company whenever you apply for one of these:

• Mortgage applications
• Auto loan applications
• Credit card applications
• Credit limit increase applications
• Student loan applications
• Personal loan applications
  

How Long Do Hard Inquiries Remain on Your Credit Report?

There isn't a set rule for this, but most credit bureaus remove the hard inquiries from your credit report in two years. The impact of hard inquiries reduces over time. If you find an unauthorized hard inquiry or an erroneously reported one on your credit report, you could approach the concerned credit bureau and get it removed.

If you happen to have multiple hard inquiries for the same product within a brief period, potential lenders might not deem it very important while considering you for a credit. If your credit report exhibits a history of on-time payments and a consistent low credit utilization ratio, your hard inquiries will not matter much while getting a loan.

What is a Soft Inquiry?

Soft inquiries take place when you check your own credit score or you allow someone else to review your credit score. Typically, a soft inquiry occurs when an employer or a company goes through your credit report as a part of your pre-hiring background verification, or your credit card company checks your credit report without your permission to check if you qualify for certain offers.

Soft inquiries are not linked to any credit application; hence, they do not affect your credit score. You can view them in your credit report, but potential lenders cannot access the information.
Common soft inquiries

These situations could lead to soft inquiries:

• Checking your credit score on mymoneykarma
• Checking for "Pre-qualified" credit card offers
• Checking for "Pre-qualified" insurance quotes
• Employment verification or background check
  

How to Manage Your Credit Inquiries

Well, you surely do not want your credit score to drop for something as annoying as hard inquiries. You are not even directly responsible for them. These tips will keep you alert and safe from unexpected hard inquiries.

• You must apply for credit only when you are in dire need.
• When you apply for a loan, make sure shopping has been completed for a brief period.
• Keep a check on your credit report to ensure that the hard inquiries are the ones that you really initiated.
• Read all documents before signing - do not authorize a hard inquiry unknowingly.
• Ensure that all other factors impacting your credit score are in good shape.
  

If you are wondering how a particular inquiry will be classified, feel free to ask the company or the financial institution involved to understand whether it's a hard or a soft credit inquiry.

Unauthorized Hard Inquiries - How Do I Deal With Unauthorized Hard Inquiries?

A hard inquiry can be hard on your credit score, especially if it is an unrecognized one. Now you must be wondering how it could be unrecognized. Well, a hard inquiry could have happened for several reasons. It could have come from an authorized lender, it could be a reporting error, or it could even indicate possible identity theft. Let's get into these three issues in detail.

Authorized Lender

A hard inquiry on your credit report can ideally be made only with your permission. An organization cannot make a hard inquiry unless you authorize it. However, some situations can be confusing.

Even if you haven’t applied for a loan or a credit card recently, you might have undergone minor changes in your lifestyle that resulted in a hard inquiry. You might have inadvertently permitted your internet service provider, cable company, teleservice provider, and even your landlord to conduct a hard inquiry on your credit report. You probably signed on documents without carefully reading them, hence not realizing that you have authorized the company to perform a hard inquiry. Even upgrading your credit card or applying for an increase in credit limit could result in a hard inquiry.

Similarly, applying for auto financing can also result in several hard inquiries. You might have authorized one dealer assuming that it'll lead to a single hard inquiry. However, your dealer might have reached out to multiple lenders, and you end up with several hard inquiries that you weren't aware of.

However, many credit score models do keep a little window to take these minor slips into account when they calculate your credit score.

Reporting Error

If you find a hard inquiry that you didn't authorize, it could either be a reporting error or fraudulent activity. You can keep an eye on your credit report using mymoneykarma's Intelligent Finance Tool. This tool shows you the source of all hard inquiries made on your credit report. Once you know the name of the lender under suspicion, you can search online for contact details and approach the concerned lender to check the reason for the hard inquiry.

The credit bureau assessing your credit score can also help you obtain this information. If the inquiry was a reporting error, you could approach the bureau to file a dispute. If it wasn't a reporting error, it could very well be a case of fraud. In such situations, you must immediately notify the credit bureau as well as your card issuing company.

Identity Theft

If you suspect that your identity has been compromised, approach the card-issuing company, and extensively look for information regarding the account. Look at the account opening date, contact details, amount charged, etc. You must seek help from the company and follow the protocols to deal with fraudulent activity.

If the account information has already shown up on your credit report, you must contact the credit bureaus. Once you have resolved the fraudulent issues, you can seek help from the credit bureaus to secure your credit file further.

You could also set up a 'fraud alert', which would require additional steps of identity verification before starting a new line of credit. Furthermore, you could put your credit file on 'security freeze', which means your data can't be accessed for extending new lines of credit unless you unfreeze it.

Make sure that you report the fraud to your local police department as well.