[Re-Post] What Is A Credit Inquiry And How Does It Impact My Credit?
Looking to apply for a loan but worried about a credit inquiry? We’re here to help.
THERE ARE TWO TYPES OF INQUIRIES:
“Hard” Credit Inquiry
“Soft” Credit Inquiry
A hard credit inquiry happens when a lender pulls your credit report to evaluate your ability to qualify for a loan. This is common when applying for a mortgage, auto loan, credit card, or personal loan. These inquiries can have a negative impact on your credit score.
A soft credit inquiry happens when you pull a consumer credit report or a lender is trying to send you a pre-approved loan offer. These inquiries will not show up on your credit report and do not negatively impact your credit score. Examples of consumer credit reports are Credit Karma, Smart Credit, or any credit report pulled by a consumer to monitor their credit.
HOW DO HARD INQUIRIES IMPACT MY CREDIT SCORE?
FiCO says that 10% of your credit score is made up of “New Credit”. This means that 10% of your credit score is evaluated on the number of inquiries you have in a given amount of time (approximately 12 months). Aggressively applying for access to credit leads to multiple credit inquiries on your credit report. Having too many inquiries on your credit report can show you as an increased risk and can negatively impact your credit score.
CAN I SHOP FOR THE BEST INTEREST RATE?
The answer is yes, but be cautious. There are multiple regulatory bodies that have opinions on this subject. The CFPB says that you have 45 days to shop a rate, whereas the credit bureaus state you have 15 days. The safe bet is that you have 30 days to shop a rate.
WHAT DOES “SHOP A RATE” MEAN?
Essentially, you should be allowed to pull credit with multiple lenders within 30 days to find the best interest rate. The inquiries from shopping for an interest rate should only impact your credit score as if it was one inquiry. The trick is, this rule only applies when shopping within a specific category of a loan, such as a mortgage or auto loan. If you apply for a credit card, auto loan, and mortgage within a 30 day period of time, this rule will not be applied.
In addition, this rule doesn’t always hold true. We’ve seen examples of people shopping for auto loans or credit card with excessive inquiries (12 or more) in a short period of time that has a dramatic impact on their credit score.
OUR ADVICE?
Be cautious when getting your credit report pulled. If you are shopping for a mortgage and have limited inquiry activity, you are probably safe to shop an interest rate. However, aggressively having your credit report pulled could potentially lead to a negative impact on your credit score.