Credit Score: How hard inquiries affect your credit report and how to avoid them

Credit score might be one of the most critical figures in any adult’s life. It reflects your borrowing and repayment habits, as documented in your credit history. Among the factors influencing your credit score are hard inquiries, often misunderstood but can significantly affect your financial standing. Let’s delve into what hard inquiries are, how they impact your credit, and strategies to minimise them.

What are hard inquiries?

A hard inquiry, also called a “hard pull,” occurs when a lender or creditor checks your credit report as part of a credit application process. This might happen when you apply for:

Lenders need this information to evaluate your financial behaviour, assess risk, and decide whether to extend credit. While hard inquiries are routine, their presence on your credit report signals to others that you’re actively seeking credit.

How hard inquiries impact your credit score

Hard inquiries can lower your credit score, though the effect is usually modest and temporary. Here’s how it works:

Impact on score: A single hard inquiry may reduce your score by fewer than five points. However, the exact impact depends on the overall health of your credit profile. For individuals with a limited or less favourable credit history, the effect may be more noticeable.

Duration: Hard inquiries stay on your credit report for two years. However, their influence on your credit score typically lasts only one year.

Multiple applications: Submitting numerous credit applications in a short period may compound the impact, raising concerns about your financial stability. That said, credit scoring models often treat multiple inquiries for the same type of loan (e.g., auto or mortgage loans) within a specific timeframe as a single inquiry. This is known as rate shopping, and the timeframe varies between 14 and 45 days depending on the scoring model.

Hard vs. Soft Inquiries: What’s the difference?

It’s important to differentiate between hard and soft inquiries, as only the former affects your credit score. Soft inquiries often occur when you check your own credit, a company prequalifies you for an offer, or during employment background checks.

When lenders see hard inquiries

When lenders notice a hard inquiry on your credit report, it signals that you have recently reached out to a financial institution for any credit product.

While a few hard pulls are usually acceptable, frequent inquiries may raise red flags. Lenders might interpret them as a sign of financial instability or over-reliance on credit.

That said, lenders understand that consumers often shop for the best rates. Therefore, strategic credit behaviour, like consolidating multiple applications within a short timeframe, may not significantly harm your creditworthiness.

Strategies to minimise hard inquiries

To protect your credit score, it’s essential to manage hard inquiries carefully. Here are some practical tips:

Prequalify for credit: Many lenders offer pre qualification tools that provide an idea of approval chances without a hard inquiry.

Avoid rapid applications: Space out your credit applications to prevent clustering hard inquiries in a short period.

Monitor your credit report: Regularly review your credit report to ensure its accuracy. Dispute any unauthorised hard inquiries to protect your credit profile.

Be selective about credit: Only apply for credit when necessary and after thorough research to find the best fit for your financial needs.

Removing unauthorised inquiries

Sometimes, your credit report may reflect inquiries you don’t recognise. These could result from errors or fraudulent activity. If you encounter such an issue:

Contact the creditor: Confirm the legitimacy of the inquiry with the listed entity, as they may have used a partner for credit checks.

File a dispute: Report unauthorised inquiries to credit bureaus like Experian, Equifax, or TransUnion.

Freeze your credit: Consider freezing your credit to prevent further unauthorised checks during the dispute resolution process.

Conclusion

Hard inquiries are a natural part of managing credit, but their impact on your credit score makes it crucial to handle them thoughtfully. By understanding how they work, being selective with your credit applications, and monitoring your credit report regularly, you can minimise their effects and protect your financial health.

Remember, building and maintaining a strong credit score is a journey. It requires mindful decisions, responsible credit usage, and staying informed about your credit profile. With the right approach, you can navigate the credit process with confidence and make choices that support your financial well-being.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.