Credit Inquiries: Definition, Importance, and Types

Your credit report is a financial snapshot of your borrowing history, but have you ever noticed those “credit inquiries” listed there? These little entries play a big role in your financial life, impacting everything from your ability to get a loan to the interest rates you’re offered. We’ll break down what credit inquiries are, why they matter, and the different types you should know about.

What is a Credit Inquiry?

A credit inquiry is a record created whenever your credit report is accessed. This typically happens when you apply for credit, like a loan or credit card. Inquiries also occur when your credit report is checked for other reasons, such as when you review your own credit information, during background checks, or when a company pre-approves you for an offer.

What are the types of credit inquiries?

There are two types of credit inquiries: hard and soft. They both work in different ways, and have different impacts on your credit score

Hard inquiry

A hard inquiry, also known as a hard pull or hard credit check, occurs when a lender or creditor requests your full credit report from a credit bureau. This typically happens when you apply for credit, such as a loan, credit card, or mortgage. Lenders use hard inquiries to assess your creditworthiness and determine whether to approve your application, as well as what interest rate to offer. Because you initiate these inquiries by applying for credit, they signal an intention to borrow. Hard inquiries can slightly and temporarily lower your credit score, with the impact usually lessening within a year, though the inquiry remains on your report for up to two years. While a single hard inquiry isn’t usually a major concern, multiple hard inquiries in a short period can raise red flags for lenders. This can suggest financial strain or over-reliance on credit, potentially harming your chances of approval.

Soft inquiry

A soft inquiry, also known as a soft credit check, occurs when someone accesses your credit report for informational purposes, not related to a specific credit application. This might happen when you check your own credit report or score, when a company pre-approves you for an offer, or during a background check. Soft inquiries do not affect your credit score and are not visible to lenders. Instead, they allow you to monitor your credit and explore financial options without any negative impacts.

How do credit inquiries work?

Credit inquiries work by requesting information from the credit bureaus regarding your credit report. The process differs slightly depending on whether it’s a hard or soft inquiry.

For hard inquiries, the process begins when you apply for credit, whether it’s a loan, credit card, or other form of financing. By applying, you’re giving the lender permission to access your credit history. The lender then requests your credit report from one or more of the three major credit bureaus: Equifax, Experian, and TransUnion. This request is what generates a credit inquiry. The credit bureau then provides the lender with your credit report, detailing your payment history, outstanding debts, length of credit history, and other relevant information. Finally, the lender uses this credit report, along with other factors, to make a decision on your application and determine the terms they’ll offer if you’re approved.

For soft inquiries, a request to view your credit report is made to one or more of the three credit bureaus. In most cases (other than when you’re checking your own report), the requester receives a limited view of your credit information, perhaps your credit score or a summary, rather than the full report. Soft inquiries generally don’t require your permission and are not visible to lenders.

What is the importance of credit inquiries?

Credit inquiries are important for several reasons, impacting lenders, individuals, and anyone seeking housing, employment, or other services that involve a credit check.

For lenders and financial institutions, credit inquiries are crucial for assessing creditworthiness and managing risk. Reviewing your credit report allows them to understand your payment history, outstanding debts, and overall credit behavior, helping them determine the risk of lending to you. A history of responsible credit use indicates lower risk, while multiple hard inquiries in a short period can suggest financial instability and make lenders hesitant.

For individuals, credit inquiries are essential for monitoring credit health. Checking your credit report allows you to identify errors or inaccuracies and spot unauthorized inquiries or suspicious activity that could indicate fraud. Soft inquiries, such as pre-approval offers, allow you to explore financial options without impacting your credit score.

Beyond lending decisions, credit inquiries can be used for other purposes. Companies use soft inquiries for marketing, tailoring product and service offers based on your financial behavior. Employers may use credit checks (with your permission, where required) to assess your suitability for certain positions. Landlords often check credit reports when considering rental applications. Even utility companies and insurance providers may use credit inquiries to assess risk and determine terms of service.

How do credit inquiries influence a lender’s decision?

Hard credit inquiries are central to a lender’s decision. When you apply for credit, lenders use these inquiries to access your credit report, which details your borrowing and repayment history. This report allows them to assess your creditworthiness, which is your ability and willingness to repay. A strong credit history with on-time payments and responsible credit management signals lower risk, making lenders more likely to approve your application and offer better terms. Conversely, negative marks like late payments or high debt, combined with multiple hard inquiries, suggest higher risk and can lead to denial or less favorable terms.

Lenders also use credit information from these inquiries to set interest rates and loan terms. Borrowers with good credit typically qualify for lower rates, while those with weaker credit may face higher costs.

How Long do Credit Inquiries stay on Your Credit Report?

Credit inquiries, both hard and soft, are recorded on your credit report. Hard inquiries typically remain visible to lenders for up to two years, although their impact on your credit score usually diminishes within the first year. The Fair Credit Reporting Act (FCRA) mandates that hard inquiries remain on your report for at least 12 months, and employment-related inquiries can last up to 24 months.

While soft inquiries don’t affect your credit score, they are still recorded in your credit report.  However, they are generally only visible to you when you access your own credit report and are not seen by lenders. The reason soft credit inquiries are recorded is to maintain a history of who has accessed your credit information and for what purpose, providing transparency and aiding in auditing. This tracking also helps you monitor your credit and identify potential issues like fraud.

How Does a Credit Inquiry Impact a Credit Score?

Only hard inquiries affect your credit score; soft inquiries have no impact. A single hard inquiry typically has a small and temporary effect, often less than 5 points on your FICO score, and its influence usually diminishes within a year, though the inquiry remains on your report for up to two years.

Why is it important to minimize credit inquiries?

Minimizing credit inquiries, particularly hard inquiries, is important for several reasons. Multiple hard inquiries in a short period can negatively impact your credit score. Lenders often view multiple inquiries as a sign of financial distress or over-reliance on credit, which makes them less likely to approve your application or may lead to less favorable terms. This is because lenders perceive an increased risk when someone is actively seeking a lot of credit.

Beyond your credit score, minimizing hard inquiries can also save you money. Each inquiry can indirectly affect your ability to negotiate better interest rates on loans and credit cards. By limiting inquiries, you increase your chances of securing more favorable financial terms and potentially saving significantly on interest and fees over time.

Protecting your personal information is another key benefit. Monitoring and limiting credit inquiries helps safeguard against identity theft and unauthorized access to your financial data. Regularly reviewing your credit report for unfamiliar inquiries allows you to quickly identify and address potential fraud.

Finally, managing credit inquiries is essential for sound financial planning. Applying for credit only when necessary and strategically timing your applications helps maintain manageable debt levels and aligns with your overall financial goals. Avoiding excessive inquiries contributes to a more stable financial picture and ensures you can access credit when you truly need it.

How many hard inquiries are too much?

There’s no magic number of hard inquiries that’s universally considered “too many,” as it depends on individual credit profiles and lender policies. However, in general six or more hard inquiries in a 12 month period are generally considered too much. This is because this number is often associated with a higher risk of financial distress and an increased likelihood of bankruptcy.

How to manage hard inquiries?

To manage hard inquiries, follow the eight steps listed below:

1. Seek prequalification or preapproval: Search for creditors that provide prequalification or preapproval without a hard pull to minimize the number of hard inquiries on the credit report.
2. Shop for rates within a window: Submit all applications for a mortgage, auto loan, or student loan within a 14-day “rate shopping” window to ensure that all inquiries are considered one, thereby minimizing the damage to the credit score.
3. Refuse prescreening offers: Opt out of pre-screening offers at OptOutPrescreen.com or by calling 888-OPT-OUT (877-567-8688) to prevent third parties from making unsolicited soft pulls.
4. Implement a credit freeze: Secure the credit reports from identity theft by activating a credit freeze, which prevents new accounts from being opened without authorization.
5. Request an increase in the credit limit: Requesting an increase in the limit of an existing credit card can prevent a hard inquiry and enhance their credit scores instead of applying for new credit.
6. Inspect the credit reports regularly: Obtain complimentary credit reports from AnnualCreditReport.com and examine the “inquiries” section to track the individuals who have reviewed the credit in the past two years. It assists in identifying any unauthorized inquiries or potential deception.
7. Submit a dispute about unauthorized inquiries. File a dispute with the credit agency to have an unauthorized hard inquiry removed, and think about adding a fraud alert to the reports to safeguard the credit.
8. Don’t rush into applying for credit. Compare offers from various lenders to identify the most favorable terms that align with your requirements. Prequalify whenever possible without triggering a harsh credit inquiry.

Can hard inquiries be removed from credit reports?

Yes, hard inquiries can be removed from your credit report, but only under specific circumstances, primarily if they are unauthorized or inaccurate. If you find a hard inquiry you don’t recognize, you can dispute it with the credit bureau that reported it (Equifax, Experian, or TransUnion). The process typically involves these steps:

1. Review your credit reports: Obtain copies of your credit reports from all three bureaus to identify any unauthorized or incorrect hard inquiries.
2. File a dispute: Contact the relevant credit bureau directly, either online or by mail, explaining why you believe the inquiry is incorrect. You can use sample dispute letters, but clearly state the issue and provide any supporting documentation.
3. Credit bureau investigation: The credit bureau is legally obligated to investigate the disputed inquiry. If their investigation confirms the inquiry is unauthorized or inaccurate, they will remove it from your report.
4. Follow up: After submitting your dispute, monitor your credit reports to ensure the inquiry has been removed. If it’s still there after a reasonable time (usually 30 days), follow up with the credit bureau.
5. Prevent future issues: To protect yourself from future unauthorized inquiries, consider placing a fraud alert on your credit reports, reporting any identity theft or fraud to the authorities, and implementing a credit freeze or lock to restrict access to your credit information.

What to do if you don’t recognize a credit inquiry on your credit report?

If you find an unfamiliar credit inquiry (hard or soft) on your credit report, take these steps to investigate and protect your credit:

1. Identify the type of inquiry: Determine whether it’s a soft inquiry or a hard inquiry.
2. Verify the legitimacy: While some unfamiliar inquiries might seem suspicious, they could be legitimate. For example, increasing your credit limit on an existing card can generate a hard inquiry, and pre-approved offers are soft inquiries. Think about any recent financial activity you’ve engaged in.
3. Check for authorized sources: The Fair Credit Reporting Act (FCRA) outlines permissible reasons for accessing your credit report. Common reasons include your own review, insurance underwriting, account monitoring by existing creditors, credit applications, and (with your permission) employment background checks. Does the name of the inquirer match any companies you’ve recently interacted with, even if you didn’t complete a full application? Review your email and mail for correspondence from the inquiring company.
4. Take action if unauthorized: If you’re certain the inquiry is unauthorized, take immediate steps to protect your credit. Place a fraud alert or credit freeze on your credit reports with all three bureaus. Dispute the inaccurate inquiry directly with the credit bureau that is reporting it, providing any supporting documentation you have.