A Hard Inquiry: What It Is & The Impact On Your Credit Score
Every application for a loan or line of credit requires a credit score inquiry. Lenders use this information to determine if the applicants satisfy their lending criteria or not.
There are two types of credit checks borrowers need to be familiar with: a soft credit check and a hard credit check. The latter can harm one’s score while the former does not. Keep reading to understand how hard inquiries impact a person's credit report and for how long.
Who Makes Hard Inquiries & Why?
A hard credit inquiry, also sometimes referred to as a ‘hard pull’, is a process by which a third party is granted access to an individual's credit report.
The report contains eight years of information regarding an individual's current credit accounts, their outstanding balances, payment history, nature of debt, and the age of the credit accounts. This information is used to determine the creditworthiness of the individual in question.
The most common third parties to use a hard credit check are listed below.
- Lenders: Lending institutions are by far the most common users of hard credit checks. Nearly every loan, whether it be a mortgage, credit card, car loan, or line of credit is approved by viewing the applicant's credit report.
- Employers: Some employers, especially government agencies that may require employees to handle sensitive data, subject job applicants to a hard credit check.
- Landlords: Less common, but not unheard of, is the use of hard credit pulls from landlords looking to judge the trustworthiness of potential tenants.
How Does A Hard Inquiry Affect A Credit Score?
It should come as no surprise that missing payments or late payments can harm a borrower’s credit score. However, far fewer individuals are aware that a hard inquiry on one’s credit report also has negative consequences.
The reason for this is not hard to understand. When creditors see a new hard inquiry on an applicant's credit report it could signal that they have found themselves in some form of financial trouble and are seeking an emergency source of financial support. This is especially true if the applicant in question has several hard inquiries within a short period.
For those who are responsible with their credit, a new hard pull is unlikely to have much of a long-term impact. However, those with a fair or bad credit score are likely to feel the impact to a much greater extent.
How Long Do Credit Inquiries Stay On Your Credit Report?
For the reasons outlined in the previous section, a hard inquiry hurts a borrower's credit score, with more than one hard pull having a much greater negative impact. Hard checks stay on a person's credit report for two years.
Unfortunately, credit bureaus do not publish the exact algorithms they use to determine a credit score. Due to this reality, it can be hard to determine exactly how many points an individual’s score will drop due to a hard credit check. All we do know is that 10% of one’s credit score is determined based on a category that takes into consideration the age of a borrower’s open credit accounts as well as how many hard inquiries have been handled over the last 12 months.
What About Multiple Hard Inquiries?
As previously mentioned, having several hard inquiries within a short period will result in a lower credit score since creditors may see the desire for new lines of credit as a sign of a person who is financially distressed. Accordingly, it is worthwhile to avoid multiple hard credit checks within a short time frame.
What You Can Do To Improve Your Creditworthiness After A Score Drops
- Try The Debt Avalanche Method: This debt reduction method involves prioritizing the repayment of the debt with the highest interest rate first. This way, the borrower reduces interest payments, making it easier to keep up with their monthly payments
- Improve DTI Ratio: The debt-to-income (DTI) ratio looks at how much of an individual's monthly income goes towards servicing their outstanding debt balances. Those with a high DTI will suffer a reduction in credit score, whereas those with a DTI of 30% or less will enjoy a higher credit score
- Make Payments On Time: Nearly half of a person's credit score is based on their payment history. Keeping all payments up to date and on time is the single best way to improve one’s credit score
While hard credit checks do hurt an individual's credit score, they are likely to cause fewer issues for people who are generally responsible with their credit. To minimize the temporary negative impact, it is best to avoid having several hard pulls performed within a short period while prioritizing on-time repayment behavior.