What Is a Hard Inquiry and How Does It Affect Your Credit?

Film buffs might recall Humphrey Bogart as Sam Spade in “The Maltese Falcon,” under that mercilessly bright spotlight during the police’s hard inquiry into his doings, with every question tightening the screws. Well don’t worry, a hard inquiry into your credit report is nothing like that — it’s just a quick credit check that shouldn’t leave you in a cold sweat.

A hard inquiry is when a lender checks your credit report – and it can affect your credit.

A hard inquiry occurs when a lender or creditor checks your credit report to decide whether they’re going to approve your application. This happens when you apply for a new credit card, mortgage, or loan product. Hard inquiries can impact your credit score because they signal your intent to take on new debt.

In this article, I’ll review the role of hard inquiries in applying for credit, compare them with soft inquiries, and discuss their immediate and lasting impact on your credit score. No sweat!

During a hard inquiry, a potential lender reviews your credit report to see if they should lend you money or offer you a credit card. This matters because it can affect your credit score. That’s why you should definitely know how hard inquiries work.

Hard Inquiries vs. Soft Inquiries

Have you ever heard the myth that checking your credit score hurts it? People who spread this misinformation are confusing a hard inquiry with a soft inquiry.

A hard inquiry occurs when you apply for a new loan or credit card and may dent your credit score slightly. A soft inquiry occurs when you or another party checks your credit for other reasons, such as a background check. Soft inquiries don’t affect your credit score.

Examples of soft inquiries are inquiries made on your credit report by you, a prospective employer, or a landlord. Only you can see these softies on your credit report. Otherwise, they are hidden. 

The Role of Inquiries in the Credit Process

It all starts with the three major U.S. credit bureaus: Experian, TransUnion, and Equifax. These bureaus collect information about 220 million consumers in their files, and chances are you’re in the system.

Hundreds of organizations, including lenders, credit card companies, and insurance companies, regularly inquire about consumers’ credit reports. You, too, can request copies of your credit reports – those are inquiries, too, but as we’ll soon see, they aren’t of the hard variety.

Credit inquiries play a crucial role in helping creditors decide whether to do business with you. When you apply for a loan or a credit card, most creditors access your credit report from at least one major credit bureau to see how well you manage your financial obligations. This helps them decide if you are likely to repay the loan or go belly-up.

The system works because credit bureaus constantly collect and maintain your credit information. When a creditor checks your credit with a credit bureau, that bureau records a hard inquiry on your report. Anyone reading your report can see your hard inquiries (for up to two years) and immediately know how often you’ve applied for a new credit account.

Everyday Situations That Require Inquiries

Credit report inquiries happen for many reasons, such as when you apply for a credit card. After receiving your application, the card issuer’s software instantly retrieves your credit file from a credit bureau and evaluates whether you qualify. 

Here’s the most interesting part: In almost all cases, no humans participate in the inquiry process – they only get involved if issues develop, such as discrepancies between your application and the data on file.

Another common situation is when you apply for a loan, such as a mortgage. Lenders check your credit to see if you can repay the loan. This hard inquiry can affect your credit report and, therefore, your credit score.

I believe it’s essential for you to understand how hard inquiries affect your credit score. Knowing the short- and long-term implications and how to minimize the harmful effects puts you in a better position to manage your credit.

Immediate Effects

Hard inquiries have a varying impact on your credit. It’s not the number that matters as much as the frequency.

Credit Score Impact

A hard inquiry can lower your score by a few points — usually five to 10 points — but the exact amount depends on your overall credit profile and how many recent inquiries you already have. A hard inquiry may impact the score much more if you have a shorter or less robust credit history. Keep that in mind if you are a credit newbie or have a low credit score.

On the other hand, if you have a strong credit history and only a few recent inquiries, a hard inquiry may only slightly move the needle. Knowing this should help you decide how often to apply for new credit.

How Long Will a Hard Inquiry Impact My Credit Score?

Hard inquiries remain on your credit reports for two years, but their effect on your credit score expires after 12 months. Your credit score may remain lower during the first year due to recent inquiries, but it will often recover after a few months. During the two-year period, your hard inquiries remain visible to anyone who checks your report.

While the initial drop in your credit score typically dissipates before too long, the mere presence of the inquiry can still impact lender decisions. Multiple inquiries in a short period signal to lenders that you want to increase your debt load and, therefore, may be financially distressed. 

When planning your next credit application, consider how long these inquiries affect your score and how they look on your credit reports.

Long-Term Influence

Let’s turn to the long-term effect, if any, that hard inquiries can have on the success of future credit applications. 

The Influence on Future Credit Applications

When lenders see a continually high application rate on your credit report, you may appear to be a perpetually high risk. Creditors may consider you financially unstable and be cautious about offering new credit — they may hit you with more stringent terms or a higher interest rate.

This long-term impact reinforces your need to manage your credit applications carefully. 

If you plan to apply for significant financing, like a mortgage or auto loan, it’s good to refrain from other applications for three to six months beforehand. 

By doing so, you can present a much more stable credit profile, increasing your approval odds and receiving a better deal from the lender.

Treatment of Multiple Inquiries Within a Short Period 

Here’s a nifty yet little-known fact: Credit scoring models (e.g., FICO, VantageScore) consolidate your hard inquiries when you make them within a short period for one type of loan, such as an auto loan or mortgage. 

The models assume that you are rate-shopping for the best loan, not several new ones. This feature minimizes the impact of multiple hard inquiries on your credit score. 

The models generally allow a rate shopping period of between 14 and 45 days. Now that you know, feel free to search out the best interest rate on a loan without worrying too much about the impact on your credit score. 

Let me warn you that the rate shopping model does not treat all clustered hard inquiries equally. A good example is applying for multiple credit cards within a short period — they each create a hard inquiry that can negatively impact your score.

Minimizing the Impact of Hard Inquiries

If you genuinely need credit, you should be okay with hard inquiries. Unless you overdo it, a hard inquiry will have a negligible impact on your credit score. Some simple planning can reduce the effects even further.

Prequalification

One great technique I recommend for reducing the impact of hard inquiries is applying to lenders who provide a prequalification process. Prequalification only results in a soft inquiry and does not affect your score. 

With prequalification, creditors tentatively review whether you are eligible for a loan or credit card based on a soft pull of your credit report. You’ll receive a preapproval offer if you prequalify. You can then formally apply, knowing that you should have a good chance of approval (although final approval is never guaranteed).

This is especially helpful if your credit is dicey and the odds of approval are against you.

The Importance of Spacing Out Credit Applications

Properly timing your credit applications can help ensure that hard inquiries only slightly impact your credit. Conversely, multiple hard inquiries in a short period can shave quite a few points off your credit score. 

Spacing out your applications allows any recent inquiries to start aging and their effect on your score to decline. This is the best way to maintain a more stable credit profile.

In addition, spacing out the credit applications can improve your chances of approval if and when you apply for a line of credit. Indeed, creditors are more likely to consider your credit behavior responsible if they see that you are not looking for new credit too often. This can lead to better terms and conditions when applying for credit.

In short, careful timing of your credit applications and leaving a sufficient interval between them can enhance your credit profile.

Lenders and card issuers pay close attention to hard inquiries when reviewing your credit report. These inquiries are one of several factors determining the fate of your credit application. Let me explain how credit providers perceive and rank these inquiries so that you can manage your credit more effectively.

Role in the Approval Process

Hard inquiries indicate that you are in the market for new credit. Creditors consider how many inquiries you’ve made and when they occurred. If you have a lot of recent hard inquiries, a lender may think you are in financial trouble or preparing to take on too much new debt. That is a serious red flag unless it’s rate-shopping (see above).

How much weight hard inquiries have differs from lender to lender. Recent inquiries carry much weight for some, but for others, it’s more about your general credit history and financial behavior. 

Nonetheless, having too many hard inquiries over a short period of time can lower your approval chances and signal to creditors that you are a high-risk borrower.

Hard Inquiries vs. Other Credit Factors

As important as hard inquiries are, they are just one factor in the approval process. Your overall credit score and recent history typically carry far more weight. 

Creditors view your score as an indicator of creditworthiness. They review your credit history to confirm how you have managed credit over time. So don’t sweat it; a strong credit score and positive credit history should outweigh a few hard inquiries.

Your debt-to-income (DTI) ratio is another critical factor that many lenders consider. It measures your monthly debt against your monthly income. The smaller this ratio is, the more likely the lender will approve your application for credit. 

Typically, creditors prefer a DTI ratio below 36%, but higher ratios may be acceptable for mortgages and subprime credit cards. Ultimately, a good DTI ratio can help you get approved for credit despite recent hard inquiries.

I’ve seen too many folks ignore their credit standing until their loan or credit card applications were rejected. When you monitor your credit reports, you can better gauge how well you’ve managed your credit. Hard inquiries are an important part of your credit profile, so it makes sense to verify them on your credit reports periodically.

Access Your Credit Reports

Accessing your credit reports is the first step in managing hard inquiries. You can get free credit reports from each of the three major credit bureaus — Experian, TransUnion, and Equifax — once a week. You can also obtain your reports at AnnualCreditReport.com. Remember, checking your credit through one of these services does not hurt it.

It’s easy to review hard inquiries when you receive your credit reports. The reports enumerate each hard inquiry from the last two years. You’ll quickly see how the inquiries may be impacting your credit score. Hard credit inquiries are usually grouped in a section called “Credit Inquiries” or “Credit Checks.” 

Each entry will include the date of the inquiry and the name of the creditor who requested it. You want to verify whether you authorized each inquiry. Remember, only you can authorize a hard inquiry, which you do automatically (and sometimes unknowingly) when you apply for most credit cards or loans. 

An inquiry you don’t recognize may indicate an error in the report, funny business on the part of a creditor, or, worse, identity theft. Let me explain how you can dispute mistakes or unauthorized inquiries.

Dispute Unauthorized Hard Inquiries

You should dispute unauthorized or incorrect hard inquiries appearing on your credit report. You can contact the credit bureau (online, by mail, or over the phone) and identify the mistake along with your reasons. Typically, you ask for proof that you authorized the hard inquiry. 

Credit bureaus are the engine of the dispute process regarding hard inquiries. When you file the dispute, the credit bureau is legally compelled to verify the inquiry with the reporting creditor. The creditor is required to validate the information and ensure it was reported correctly. 

If the creditor cannot verify the inquiry, the credit bureau will delete the item from your file and recompute your credit score. Throughout, the credit bureau should keep you informed of your status. 

Now, I’ll let you in on a little secret: Many creditors don’t bother responding to requests to prove authorizations. Why? Well, it costs money to do so, and moreover, some creditors don’t maintain the necessary records. The upshot is that you may be surprisingly successful in challenging hard inquiry authorizations. Capiche?

I advise you to keep your credit report accurate. After all, why suffer for someone else’s mistakes? Understanding the workings of credit bureaus makes it easier for you to benefit from the dispute process, thereby ensuring that your credit report is fair and accurate. 

It may take about a month to resolve a dispute, and you should always receive the results in writing. You can appeal a decision that goes against you if you can provide additional documentation. You can also append a short note to your credit reports to explain your perspective.

Watch Your Credit Activity Closely

Monitoring your credit activity is essential to staying on top of your credit. Credit monitoring tools and services can help you keep track of changes to your credit report in real-time. Many credit monitoring services will also alert you to new hard inquiries so that you can respond quickly if necessary. 

Monitoring also provides data regarding your credit score and how you might increase it. On occasion, you may identify problems before they escalate. Being proactive can prevent minor problems from mushrooming into significant issues. 

Keeping close tabs on your credit activity is important to maintaining a healthy credit score.

It has several benefits:

• First, it helps quickly identify and dispute errors or unauthorized hard inquiries.
• Second, knowing your status at any point assists in making sound financial decisions.
• Regular monitoring will also enable you to gauge your progress in improving your credit score.
• Most importantly, it can help you detect any signs of identity theft.

Early detection may allow you to prevent potential fraud before it wreaks havoc. Regularly checking your credit reports is a simple yet effective way to safeguard your credit health.

As much as hard inquiries may feel like a police investigation into your finances, they help lenders to assess your creditworthiness. Whether you apply for a personal loan, credit card, or mortgage, potential lenders want to know how you have managed credit in the past. 

That’s why they pull your credit report and review your current debts, history of credit, and any blemishes, such as late payments or defaults in past years. This process is a reliable method for lenders to estimate your ability to repay debts and thereby help them control their risks. 

Hard inquiries ensure the entire loan process maintains transparency and fairness. They are a standard technique most lenders use to evaluate potential borrowers. This consistency protects both lenders and borrowers by promoting responsible credit practices. 

As a borrower, knowing that hard inquiries are an inevitable part of the process can help you understand their impact on your credit score. Although hard inquiries may temporarily reduce your credit score, they are necessary to the financing process and benefit both creditors and you.