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Financial institutions, creditors and even prospective employers want to know how well you handle your money. They use soft and hard credit inquiries to find out.

Say a bank is preparing a massive credit card offering and wants to target people with credit scores above a certain number. It could run a soft inquiry to find its potential customers. Other soft inquiry examples include you checking your own credit score, or a potential employer checking your credit score as part of a background check. It’s essentially an informal skimming.

The good news about soft inquiries is that they have no impact on credit scores. Hard inquiries are a different story, however.

Applying for a credit card, mortgage, car loan or any other type of credit requires a hard inquiry. The results will generally determine whether the applicant is approved or denied.

Hard inquiries can also have a negative impact on your credit score, because credit checks are sometimes a sign that you’re in financial trouble and need money fast. According to FICO, the company that calculates credit scores, people with six inquiries or more within a year are eight times more likely to file for bankruptcy.

Some people will see no impact on their credit score from a hard inquiry; others may see a drop of up to five points. Applicants with shorter credit histories and fewer accounts are more likely to see a larger impact.

Try to keep hard inquiries to a minimum. One or two a year isn’t a problem, but more can cause problems if you later apply for a loan.

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