What Is a Credit Inquiry?
A credit inquiry is a request by an institution for credit report information from a credit reporting agency. Credit inquiries can be from all types of entities for various reasons, but are typically made by financial institutions. They are classified as either a hard inquiry or a soft inquiry.
What Is A Credit Score?
- Companies check credit to make decisions such as lending money for cars, houses, or credit cards.
- A hard inquiry will affect your credit score, while a soft inquiry will not.
- Soft inquiries are usually made when you request a credit report or credit score for yourself.
How a Credit Inquiry Works
Credit inquiries are a significant component of the credit market. Hard inquiries are a key part of the underwriting process for all types of credit. Soft inquiries help credit companies to market their products and can also be used to help consumers.
Hard inquiries are requested from a credit bureau whenever a borrower completes a new credit application. They are retrieved using a customer’s Social Security number and are required for the credit underwriting process. Hard inquiries provide a creditor with a full credit report on a borrower. This report will include a borrower’s credit score as well as details on their credit history.
Hard inquiries can be harmful to a borrower’s credit score. Each hard inquiry usually causes a small credit score decrease for a borrower. Hard inquiries remain on one's credit report for two years. Generally, a high number of hard credit inquiries in a short period of time can be interpreted as an attempt to substantially expand available credit, which creates higher risks for a lender. For those unable or unwilling to wait two years and who are comfortable paying a small fee, one of the best credit repair companies might be able to get the hard inquiries removed from a credit report sooner.
In some instances, hard inquiries may also be used for situations other than a credit application. An employment background check and a lease rental application are two instances when a hard inquiry may also be required.
Soft inquiries are not included on a credit report. These inquiries can be requested for a variety of reasons. Credit companies have relationships with credit bureaus for soft inquiries that result in marketing lists for potential customers. These soft inquiries are customized by the credit company to identify borrowers that meet some of their underwriting characteristics for a loan.
Credit-aggregating services also use soft inquiries to help borrowers find a loan. These platforms require information about a borrower including their Social Security number which allows for soft inquiries and prequalification offers. Many lenders will also provide a borrower with quotes through a soft inquiry request that can help them understand potential loan terms.
Personal credit reports are also obtained through soft inquiries. Individuals have a right to obtain free annual credit reports from credit reporting agencies that detail their credit information. Individuals can also sign up for free credit scores through their credit card companies. These credit scores are reported to borrowers each month and are obtained by the credit card company through a soft inquiry.
Example of a Credit Inquiry
Let's assume John is looking to purchase a new vehicle. After deciding on the make and model, he decides to look into financing terms. The dealership has an on-site financing arm and pulls John's credit report. John has had a steady job for four years and doesn't have any outstanding debts. He's also paid his bills on time throughout the years. Based on the credit inquiry, the dealership offers him their lowest percentage rate of 4% to purchase the vehicle.