When you apply for a new credit card or loan, a credit inquiry is placed on your file. Lenders do these inquiries to determine how much of a risk you are. Unfortunately, as a result, your credit score is damaged. And this is scary to many people.
The fear of a low credit score has convinced a lot of people to stay as far away as possible from credit inquiries. But, the truth is not all of them are harmful. And those that are might not make as much damage as you think. Here’s what you need to know about them.
Types of credit inquiries
There are two main types of credit inquiries: soft credit inquiries and hard credit inquiries. One of them can damage your FICO score, but the other is harmless.
Soft credit inquiries
Soft credit inquiries include all inquiries except those done by lenders with the intention to review your credit because you’ve applied for a new loan with them. They can include background checks, checking one’s own credit report for errors, credit checks made by businesses to offer you goods or services, or inquiries made by businesses with whom you already have a credit account, and they do not affect your credit score.
Hard credit inquiries
Unlike soft credit inquiries, hard credit inquiries will affect your credit score. They only occur when you apply for a new credit card or a new loan for a car or a home, and financial institutions, such as credit issuers or lenders, check your credit report when making lending decisions.
For many people, a hard inquiry will generally result in a small change to your FICO score, that won’t affect it for long. However, if you have few accounts or a short credit history, it could have a greater impact.
It’s also important to note that multiple hard inquiries of different types will lower your score. However, FICO considers multiple inquiries of the same type made within a period of 14 to 45 days as a single inquiry. This can be a great help if you plan to apply to refinance your mortgage with multiple lenders, as the effect on your score is minimal.
The bottom line
While you do need to be careful about hard inquiries, it doesn’t mean that you have to be afraid of all inquiries. Since soft inquiries will have no effect on your credit score, don’t be afraid to check your own credit report. This can actually be a very good thing, as you might identify errors and stop them before they do any real damage to your financial health.
As for hard inquiries, they might lower your credit score, but this doesn’t mean that they have to influence your financial plans. If getting a new credit card or a new loan makes sense for you, don’t let a new hard inquiry stop you. With time, it will disappear. Not to mention that, if you’re a financially responsible individual, you won’t even feel it.