Credit bureaus analyze a variety of factors when determining a credit score. Credit card utilization, payment history, and derogatory marks have the highest impact. The age of the credit history has a medium impact, while the number of total accounts and hard inquiries has a low impact. While the impact of hard inquiries is low, it can still cause a score to tumble five to ten points, which can make all the difference when trying to secure credit.
If you want to take better control of your credit, learn the difference between hard and soft inquiries.
Hard Inquiries: What You Need to Know
If you apply for credit, the financial institution will make a hard inquiry, or “hard pull.” You have to consent for the lender to check your credit with a hard inquiry. This type of credit check occurs when you apply for some sort of credit, such as a mortgage loan, auto loan, credit card, student loan, or business loan.
You may wonder why credit bureaus ding your credit when you make hard inquiries. The reason is pretty simple. First, you seem desperate when you make multiple hard inquiries. Desperation isn’t a good sign when extending credit, so your score goes down. Second, it is likely you’ve been turned down for credit when you make several hard inquiries. Doing so often appears as if you’re applying for one credit card or loan after the next and as a result, credit bureaus reduce your score.
If you make too many hard inquiries, you could end up in another credit bracket. For instance, it’s not unusual for someone with fair credit to end up with poor credit after making numerous hard inquiries.
That doesn’t mean you should avoid hard inquiries altogether. You will need credit from time to time, which means hard inquiries will be necessary. Fortunately, you can minimize the impact these pulls have on your credit score.
For instance, let’s say are you are shopping for a car. You want the best interest rates, so you end up making several requests for credit. That’s okay, as long as you make all of those inquiries in a short period of time.
If you make inquiries for the same type of credit in a short period of time, the credit bureaus will likely pick up on it. They’ll realize you are comparison shopping and trying to avoid accumulating a lot of credit at once. In doing this, you will not appear desperate. It will be clear that you just want the best rate.
In most cases, the credit bureaus will group all the inquiries together so your score won’t be reduced by much. Just make sure you go at the right speed. You usually have to conduct all the inquiries within two weeks if you want them to be grouped together.
You can also reduce the impact of hard inquiries by choosing wisely when it comes to selecting credit. Look at your credit score and determine what you can qualify for. If your credit isn’t good enough to qualify for a specific credit card, don’t apply for it, as you won’t be able to receive the card and your credit score will take a hit. However, if it is clear that you qualify for a card, apply for it and only it. This way, the impact will be minimized.
Soft Inquiries: What You Need to Know
When a company or institution makes a soft inquiry, it isn’t making a lending decision. You aren’t actually going to receive a credit card or a loan based on the inquiry, and in many cases, you don’t even authorize it. Therefore, it does not impact your credit score.
For instance, a credit card company might make a soft inquiry to determine if it should send you a pre-approved offer. In this instance, you won’t actually initiate the credit pull.
Employers also run soft inquiries before hiring employees. Similarly, companies and landlords run them when conducting background checks. Vertical Rent also uses soft inquiries for various tenant screening services such as tenant background checks. This allows landlords to screen tenants without damaging anyone’s credit.
Hard Inquiries: Did You Give Permission?
You have to give permission for a company to conduct a hard pull of your credit. It’s important to look at your credit report to make sure that you don’t have any hard inquiries that you didn’t authorize. If you do, you can file a dispute with the credit bureau. Once the inquiry is removed from your report, your score will go back up.
Don’t just dispute the inquiry, though. You might be a victim of identity theft, so consider placing a fraud alert with each of the credit bureaus. This will make it much more difficult for people to access your credit without your permission. Then, you won’t need to worry about unauthorized hard inquiries ending up on your credit report. You also won’t have to worry about anyone taking out a credit card or loan in your name.
Be Smart When Pulling Your Credit
The thought of applying for credit can be frightening. No one wants to end up with a lower score, but if you are smart about how you pull your credit, you will be fine. Take the time to think about it before making a hard pull and only apply for credit when necessary. When it comes to soft pulls, though, you do not need to worry. You can make as many as you want without impacting your credit. That means you can pull tenant credit reports and more without any worries.