Credit Score: Hard Vs. Soft Inquiry

How trustworthy are you with your finances? Financial institutions, creditors – even prospective employers – want to know and your credit report is how they find out. Sometimes they check you out without you knowing – and sometimes it can have a negative effect on your credit score. That could spell trouble if you’re in the market for a home or other high-dollar loan.

They’re Called Inquiries

That’s the official credit industry word that means somebody looked at your credit score. There are two types of inquiries: soft and hard. One has a negative impact on your credit score – the other doesn't.

Let’s say that a bank was preparing a massive credit card offering mailer but only wanted to send it to people with a credit score above a certain number. It could run a soft inquiry to assemble the mailing. The bank won’t ask your permission and you probably won’t know, but don’t fear: A soft inquiry has no effect on your credit score.

Other examples of a soft inquiry include you checking your own credit score or a background check initiated by your employer or another organization.

Hard inquiries are different. When you apply for a credit card, auto or home loan – or any other type of credit – that’s a hard inquiry. This is more than an informal skimming of your score; it’s a real look for the purposes of approving or denying a loan. Hard inquiries may negatively impact your credit score but not necessarily.

According to FICO, the company responsible for calculating your credit score, many people won’t see any impact to their score from one voluntary inquiry while others could see a drop of "less than 5 points."

How is the effect calculated? It depends on other information specific to you, but FICO says that if you have few accounts or a short credit history, hard inquiries are likely to have a larger impact on you.

But why a penalty if somebody checks your credit? Because that could be a sign that you’re in financial trouble and need money fast. According to FICO, people with six or more inquiries are eight times more likely to file for bankruptcy.

Real-World Scenarios

If you’re shopping for a home mortgage or a car loan, it’s possible that multiple credit companies could run a hard inquiry on you. Credit agencies vary slightly, but if all of those inquiries are within a 45-day period, FICO will see them as one inquiry.

But if you’re the type that opens and quickly closes store credit cards to receive the introductory teaser rate or free gift (don’t do that), you could find yourself unable to qualify for a loan because of the number of hard inquiries on your credit.

Remember, each hard inquiry could cost you close to 5 points until enough time goes by that they are not affecting your report as much as they first did.

The Bottom Line

Soft inquiries – there is no need to be concerned. They'll come at your report from all directions and it’s likely you won't even know about them. That’s OK because they are not doing any damage to your credit score.

Hard inquiries – keep them to an absolute minimum. One or two per year probably isn’t a problem, but more than that can spell trouble if you later apply for a loan.

Of course, always keep an eye on your credit report. At least once each year, check your report from all three credit bureaus for errors and dispute anything that shouldn’t be there.