A credit inquiry is what happens when a lender checks your credit report to get an idea of your creditworthiness. Here’s what you need to know about the two main types of credit inquiries.
Hard Credit Inquiry
These happen when lenders perform a full credit check at the point of lending. They’ll have full visibility of everything on your credit report and leave a “footprint” – meaning other inquiries in the future will see a record of this hard inquiry.
Lenders typically run hard credit inquiries for things like mortgages, cell phone applications, loans, credit cards and car finance. Hard inquiries stay on your credit report for up to 2 years and too many will harm your credit score. As a rule of thumb, try to keep the number of hard inquiries on your report to one or two and plan ahead if you're going to take out a mortgage.
After taking out a new line of credit, it’s typical to see a decrease in your score. This makes perfect sense because you’ve just increased your indebtedness and you’ve not yet shown that you can afford to repay it. This makes you a higher risk for future credit applications so it’s reflected in a slightly lower score. On the positive side, you’ve got an additional active account on your credit report and a chance to show your ability to manage repaying it.
Soft Credit Inquiries
A relatively recent development, soft credit inquiries only give an indication of your chances of getting credit. But the big advantage is they leave no footprint, saving you from piling up hard checks on your credit file if you’re only shopping around.
Most comparison sites use a soft inquiry to check the whole market at once. They send your details to one or more third parties who compare your soft search results against people who have successfully borrowed from various lenders. Your chances of being accepted are usually given as a score or percentage. Some lenders will even pre-approve you based on this soft inquiry.
One thing to note is that you’ll be able to see in your credit report the soft inquiries which have been performed on you. But don’t worry; these aren’t shared with lenders so they don’t impact your chance of approval.
To protect your credit history, always try and use a soft credit inquiry before making your final application.
What to do if you’re declined
If you are declined, then don’t keep applying for credit. You risk damaging your credit file further. Examine your credit report to determine what caused your application to be declined. By addressing the source of the problem, you can start fixing this and avoid such issues in the future.
This post was written and compiled by the credit experts behind Loqbox – a completely free way to grow your savings and build your credit score.
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