What is a Credit Inquiry? How Credit Checks Determine Your Borrowing Opportunities

Imagine you’re at a department store. As the cashier finishes ringing you up, they proceed to ask whether you want to apply for a store credit card. I know, the store discount looks really enticing, but if you say “yes,”  you may not realize you’re also approving a credit inquiry. 

A credit inquiry happens when someone checks your credit report. Reasons for inquiries can include seeking a loan, applying for a new credit card, or even searching for a new job or apartment. The requests fall into two categories: hard inquiries and soft inquiries. What category your credit check falls into depends on the purpose of the request. 

When you or a third party requests your credit report, that is called a credit inquiry. If you apply for a loan, credit card, or mortgage, the lender will run a hard inquiry, which can impact your credit score.

Although credit inquiries are essential for approving certain financial opportunities, they also have the potential to impact your credit score. For example, multiple credit checks within a short period can cause your credit score to take a small hit. 

Once you understand the different types of credit inquiries — and how they can impact your credit scores — you can manage them confidently moving forward. So let’s start at the beginning and add to your understanding as we go. 

The two types of credit inquiries, hard and soft, differ based on how they affect your credit. You’ll likely experience one or the other, whether you just want to check your own credit status or apply for a financial product. 

Hard Inquiries

Hard inquiries are typically required when applying for a line of credit. These credit checks are only recorded on your credit report when a lender or company requests them for a loan or financing application. They’re called “hard” inquiries because they indicate your intent to apply for some sort of loan or financing. 

You usually approve hard inquiries when shopping for a new loan, such as a car or a mortgage. Hard inquiries also inform lenders of how many applications you submit, alerting them to how recently and frequently you shop around for new accounts. 

A hard inquiry can remain on your credit report for up to two years but only impacts your credit scores for up to one year. 

Soft Inquiries

Now let’s take a look at soft inquiries. A soft inquiry refers to a credit check done for reasons other than financing approval. This type of credit check can be requested by you or a company seeking to review your credit file. They’re considered “soft” since there’s not any major financial consequence to doing one: you’re just taking a peek, is all.

Reasons for soft credit inquiries include background checks by employers, pre-screened credit offers from credit card issuers, and self-reviews before applying for financing.

It’s important to note that companies can request soft inquiries without a person’s permission, but they must have a legal purpose for doing so.  

Unlike hard inquiries, soft inquiries don’t impact your credit score. Though they can be included on your credit reports, they’re only visible to you and are not shared with lenders or creditors.

Credit inquiries are essential to help lenders determine whether to approve an applicant. Financial institutions make these inquiries to evaluate a person’s creditworthiness based on their credit history before trusting the applicant with financing. 

Effect on Credit Score

Although soft credit inquiries don’t impact your credit scores, hard inquiries can. The impact generally comes down to the number of times you approve a request for an inquiry. 

Multiple inquiries can drive down your credit scores. If you have multiple inquiries in a short time, lenders and other companies can interpret this as an attempt to quickly expand your available credit, leading them to see your approval as a higher risk.

Yes, you might only be interested in perks like store discounts or bonus miles, but lenders have to assume the worst. 

A one-time hard credit inquiry on your report leads to a different outcome because lenders may view you as more responsible and less likely to amass credit you can’t pay back. But sometimes, multiple hard inquiries are unavoidable. Thankfully, many issuers and lenders make exceptions for these cases.

Influence on Loan Approvals

Lenders use your Social Security number to submit inquiries and view your credit report during loan assessments. Once they pull up your history, they can see the number of hard inquiries you have approved in the last two years since inquiries serve as a timeline for when you apply for new credit. 

A lender can decide whether to approve your application based on how recently and frequently your inquiries have occurred (among several other things, such as your credit score, income, and payment history). Hard inquiries can indicate different things to different lenders. Often, it’s seen as an attempt to quickly expand your line of credit, which is kind of sketchy. 

But the recency of inquiries can also be a positive factor for applicants. Multiple recent inquiries show that an applicant is presently rate shopping for financing, whether that’s an auto loan, a mortgage, or a new utility provider. 

Lenders weigh that in the decision-making process and are less likely to penalize an applicant because multiple recent hard inquiries typically count as one inquiry if submitted during a certain period, provided they’re for the same type of credit product. The time frame depends on the credit scoring model used but ranges from 14 to 45 days.

This time frame exception doesn’t apply to every type of loan. While you can shop around for mortgages and auto loans, several inquiries for credit cards are seen as a red flag. Do your research before applying for one of those.

In fact, see if you can get preapproved before applying, as securing preapproval is a good indicator you’ll be approved before you officially apply and incur an inquiry on your credit reports.

Hard inquiries may negatively impact your credit in the short term, but finding a loan or credit card that works best for your long-term financial situation is the priority. 

Perception of Creditworthiness

Multiple factors can impact your creditworthiness, but credit inquiries can greatly influence a lender’s perception of you as a borrower. 

The number of hard inquiries you have can reflect your financial responsibility. Too many frequent inquiries can shape the perception that you’re trying to accumulate loans and credit you can’t pay back. 

Keep in mind that the perception of hard inquiries depends on the situation. As I mentioned before, recent hard inquiries can also reveal to a lender that you’re doing your due diligence while shopping for a loan. So don’t worry about having to find the right product or loan on your first try. 

Learning how to manage credit inquiries can help maximize your loan applications. I believe it is important to understand the inquiry’s impact and how to approach the financing process to increase your approval odds.

Plan Your Applications

Planning your applications can make a significant difference when applying for new credit and help protect your credit score from negative impacts. 

In my experience, one way you can minimize impact is by timing your credit applications. Being intentional with when you submit all of your applications may allow you to leverage the rate-shopping buffer lenders allow. 

Depending on the credit scoring model, you have 14 to 45 days to review different lenders and find the best financial opportunity for you. Try to submit your applications within that time frame to avoid additional negative impact.  

FICO and VantageScore, the two widely used credit scoring models, treat hard inquiries differently, but both provide at least two weeks to shop for rates. FICO typically counts all hard inquiries for auto loans, installment loans, and mortgages as one inquiry during a 45-day span — if they are related to the same request. Some older FICO models still use a 14-day span, so be aware of that discrepancy when applying.

I also learned that VantageScore uses a 14-day rolling window that treats all hard inquiries for loans in the same amount as one during a two-week span. That way, you won’t have to settle for the first product and shop around for the best fit for your needs.  

It’s best to line up all your candidates and then send all your inquiries out at once. This helps ensure you stay within that rate shopping window. Don’t hyperfixate on one option, send an inquiry, and then agonize over it for weeks. 

Before filling out multiple applications, gather all necessary documents because each lender will require the same financial information. Being prepared will help speed up the application process and help you get the best loan with minimal impact from hard inquiries. 

Monitor Your Credit Report

You can check your credit reports in a few ways. Each of the three nationwide credit bureaus offers a free copy of your credit report every 12 months. You can also visit AnnualCreditReport.com to check your credit reports for free as often as each week. These types of credit pulls are soft inquiries, so they won’t hurt your credit. 

Reviewing all three credit reports can help you get a more accurate picture of your credit standing and spot any possible inaccuracies. 

Credit reports have information about your identity, credit history, and credit activity, as well as information from public records. While reviewing your reports, check each section and compare them to your financial records and previous annual reports. 

I suggest that you use credit report monitoring tools and services to get regular updates on your credit reports. These tools can alert you of any changes to your reports, so you’re always in the know. 

Dispute Inaccurate Inquiries

Unfortunately, inaccurate inquiries can occur. Maybe someone typed your name wrong, added an extra zero somewhere, or committed a felony. Things happen, you know? Although they aren’t common, knowing how to handle them can help you avoid their effects. 

If you check your credit report and see outdated or inaccurate information, you can file a dispute with the credit bureau. By doing so, you can have the error either updated, deleted, or verified.

To dispute an incorrect inquiry, you can send a claim to the credit bureaus or data furnishers via email, phone, or online. Data furnishers are the institutions that report to credit bureaus, which include credit card issuers, lenders, and other financial entities. 

You will need to have relevant documents on hand to confirm the inaccuracy. As for dispute timeframes, resolutions usually happen within 30 days.

Shopping for a new line of credit doesn’t have to be a taxing endeavor. However, credit inquiries are necessary to secure financing, and you can always prepare to minimize negative effects. In my opinion, credit inquiries and credit scores provide a nice metric for both the borrower and the lender to decide if a loan or line of credit is right for them.

Financial institutions must perform a credit check to determine your creditworthiness and loan terms. Credit inquiries are based on your credit history, so reviewing your credit report can help you plan for successful loan applications.