Well, we all are familiar about how important it is to check credit reports at frequent intervals. But, at the same time, it is also significant to understand that applying for a new loan or credit at short intervals, is not at all a good idea. If you have checked your credit report carefully, you must have noticed a credit inquiry section, which shows the number of inquiries pulled on your account. Notably, the factor contributes 10% of the credit scores, and thus, it is advised to avoid frequent loan applications in a short span of time.
What is a credit inquiry?
First of all, there are two types of inquiries – Soft and Hard, and to know their impact on credit health, it is essential to gain an understanding of both the terms.
Soft inquiry is pulled either by you or the creditors to know your financial standing. While you request a credit report to get your account information, lenders pull a credit report to provide you pre-approved loan offers based on your eligibility. It is important to note that soft inquiries don’t have any impact on the credit scores and thus, you can check it for even hundred times without hitting the financial health.
On the other hand, hard inquiry is pulled whenever you apply for a new loan and the lenders check the credit report to determine your eligibility. Basically, hard inquiry occurs when you allow the lender to check your credit health in order to consider loan application for approval. While soft inquiries have no impact on credit report, frequent number of hard inquiries can hit the scores by 10 to 30 points. Hard inquiries could remain on the credit report for up to 2 to 3 years. Therefore, it is advised to make multiple loan applications in short interval otherwise your actions could give an impression to the lenders that you’re credit hungry and a high-risk customer.
Examples of soft and hard inquiries:
• Checking your own credit scores – As mentioned earlier, when you check your own credit report, it goes into a soft inquiry. Details on the soft inquiry section are only visible to you and not to the lenders.
• Pre-approved credit offers – When lenders do a credit check on your accounts in order to provide you pre-approved loan and credit card offers, it is considered a soft inquiry. Here, the lender pulls a credit report out of their choice and not on your request.
• Pre-qualified insurance quotes – Yes, even the insurance companies pull a soft inquiry to offer you pre-qualified insurance quotes at discounted premiums and extended coverage benefits.
• Employment verification – Today, even the companies do check their employees’ credit history to determine whether they are trustworthy to work with. This usually happens when you apply for a new job and the employer pulls a soft inquiry for employment verification purpose.
• Mortgage applications – Even if it is a secured loan, lenders do a credit check when you apply for a mortgage loan. The loan is usually applied to purchase a home or real estate property.
• Auto loan applications – When you plan to get a new bike or car and apply for an auto loan, it pulls a hard inquiry as the potential lenders check your creditworthiness before sanctioning a loan.
• Personal loan applications – Personal loan is the best option if you want to fund a wedding, pursue a degree, cover medical expenses, or finance a trip. However, due to its unsecured nature, lenders are keen to learn about the applicant’s eligibility and credit standing before approving the loan.
• Credit card applications – Today, credit cards are man’s best friend when it comes to managing finances well. Though, when you apply for a new credit card, it pulls a hard inquiry. Thus, it is advised to check your eligibility in advance to avoid application rejection and a hard inquiry.
Note: In case, the number of inquiries are pulled in regards to a particular loan within 30 days of time, it is counted as a single inquiry, referred as rate shopping. For example, you’re getting car loan quotes from multiple lenders within a span of 30 days, then only one inquiry will be counted for the given period. However, the applications must be related to a specific loan only.
Tips to avoid frequent number of inquires:
• Brainstorm before applying for a new loan or credit card to determine whether you really need this financial assistance. Think twice before making a final call.
• Do your rate shopping to get loan quotes on rate of interest, loan tenure, fees and charges, and eligibility criteria. This will save you from making multiple applications and facing number of hard inquiries in a short interval. Once you know which lender is offering the best loan quotes, you can go further with your loan application.
• Make sure to check your credit report often to identify any unauthorized hard inquiry on your credit accounts. Report any such inquiry to the credit bureau to get the issue resolved at the earliest.