Keep It In Perspective
Itâs important to keep the potential impact of hard inquiries in perspective. Yes, they can impact your credit, but inquiries only make up 10% of your credit score to begin with. The remainder of your credit score is determined by:
- 35% Payment History
- 15% Length of Credit History
- 10% Types of Credit in Use
Hard inquiries also have a short shelf life when it comes to credit scoring. Theyâre ignored after 12 months and some are bypassed even before then.
In the world of credit scoring, where it takes years and years to build up the length of credit history, thatâs a very short period of time.
Yes, hard inquiries affect your credit score. But putting too much emphasis on credit inquiries is like trying to blame the brownies you ate last week for being the reason youâre overweight. Sure, the brownies might have been a bad choice, but if you need to lose a significant amount of weight, you likely have bigger underlying issues to overcome.
In the same way, if youâre not happy with your credit score right now, too many inquiries are probably only a small part of the problem. Itâs smart to avoid applying for new credit excessively, but youâre better off focusing on the credit score categories that matter more.
For example, youâre more likely to improve your credit score by making a commitment to pay your bills on time every month, working to pay down your overall credit card balances and maintaining credit for a length of time.
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Shopping for credit can be smart. But it can also affect your credit scores. If you are someone who takes the time tomonitor your credit report and scores, losing a few points can be stressful.
There are benefits to maintaining a high credit score. Youll often get approved for credit faster and easier, and you can qualify for the best interest rates, including zero percent offers. That means you can borrow money cheaply, or even free. You may also be in a better position to negotiate a price on, say, a home or car if you have a high credit score.
To keep you from losing sleep over losing points, weve created this quick guide to help you understand hard inquiries and their impact on your scores. So here goes:
You Can Shop Around For A Mortgage And It Will Not Hurt Your Credit
Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry. This is because other creditors realize that you are only going to buy one home. You can shop around and get multiple preapprovals and official Loan Estimates. The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check. Even if a lender needs to check your credit after the 45-day window is over, shopping around is usually still worth it. The impact of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run. Note: the 45-day rule applies only to credit checks from mortgage lenders or brokers’ credit card and other inquiries are processed separately.
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How Do Multiple Credit Inquiries Affect Your Score
Can multiple credit inquiries have a negative effect on your credit score? It depends on what kind of credit youre shopping for.
If youre rate shopping to find the best interest rate on something like a mortgage or an auto loan, the major credit bureaus and FICO understand that youre likely to have multiple credit inquiries on your account. Thats why multiple inquiries for the same type of credit are considered as a single inquiry if they occur within a specific time span. Older FICO scoring models consolidate inquiries made within two weeks, while the newest FICO score gives consumers 45 days to shop around for the best rates and terms.
If you apply for multiple credit cards in a short time period, each application will add a new hard credit inquiry to your credit report. This could make a big difference in your interest rates if you are on the border between good credit and excellent creditand its one of the reasons why its a good idea to wait at least 90 days between credit card applications.
What Influences Your Credit Score
Many factors go into determining your credit score. Heres a brief overview of the primary considerations.
- Payment history 35% Shows all debts aside from mortgages.
- Length of credit history 15% How long youve had a credit history and how consistently youve used credit.
- Diversity of credit 10% how many different types of credit you have. The more the better.
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Consent And Credit Checks
In general, you need to give permission, or your consent, for a business or individual to use your credit report.
In the following provinces a business or individual only needs to tell you that they are checking your credit report:
- Prince Edward Island
Other provinces require written consent to check your credit report. When you sign an application for credit, you allow the lender to access your credit report. Your consent generally lets the lender use your credit report when you first apply for credit. They can also access your credit at any time afterward while your account is open.
In many cases, your consent also lets the lender share information about you with the credit bureaus. This is only the case if the lender approves your application.
Some provincial laws allow government representatives to see parts of your credit report without your consent. This includes judges and police.
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How To Dispute Inaccurate Hard Credit Inquiries
You should check your credit history every year by using the free report available to every consumer through an official website. What happens if you see a hard inquiry that you didnât authorize or recognize? Itâs possible that you are the victim of identity theft, or a company made a mistake.
Contact the credit bureaus that issued the erroneous report and go through their petition process for correction. Each will have a slightly different method, but itâs important you donât delay in getting the process started.
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What If You Spot An Unauthorized Credit Inquiry Hurting Your Score
As a responsible consumer and small business owner, you should be requesting a free credit report to review at least once a year.
Not only can you use the information on your credit report to make sure youâre practicing behaviors that will help your credit score , you should also be looking at your credit report for errors.
In 2012, the Federal Trade Commission found that one in five credit reports contained errors in themâand thereâs no indication that this statistic has gotten any better.
There are a variety of credit report errors that could show up on your credit report. One of those is a false hard credit inquiry.
On your credit report, youâll find a section at the end of the report called âCredit Inquiries.â
Check the list of creditors or issuers that have done a hard credit pull on your report. Hard credit pulls must be authorized by you. If there are items listed in this section that you never authorized, you can dispute these items and request to remove them.
You can first tackle the dispute process on your own by contacting the creditor that performed an unauthorized credit inquiry. State that you believe the hard credit pull to be unauthorized, and request that the information be removed from your records and updated with each credit bureau.
And finally, itâs important to reiterate that credit inquiries donât stay on your credit report for as long as other pieces of negative information do, and they donât hurt your score as much, either.
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Does Applying For A Credit Card Hurt Your Credit Score
The short answer is YES, it can. But, if it does damage your score, one credit inquiry usually wont impact credit scores very much or for very long.
According to Fair Isaac Corporation, which administers the FICO credit score, most people who have one hard credit inquiry will see a reduction in their credit scores of less than five points. Some may not see any score reduction at all .
But FICO doesnt disclose its exact algorithm. So, there is a risk that a new hard credit inquiry on your credit report could reduce your credit score slightly. Plus, when you have many hard inquiries , it can become problematic when applying for new credit cards due to certain card issuer qualification standards.
If you apply for many accounts all at once or over a short period of time, theres a risk you could see your credit scores drop significantly. And, if you have relatively few credit accounts or a short credit history, the impact of hard inquiries could be more significant.
Hard inquiries impact FICO scores for one year, even though they stay on credit reports for two years.
Its important to remember that credit decisions are not always based entirely on a credit score. There are other factors that can be considered in a lending decision, like the number of hard inquiries youve had in the past two years, even though theyre no longer factored into your credit scores.
Disputing Inaccurate Hard Inquiries
Its recommended that you review your credit reports periodically to make sure youre on track and that no errors are lurking.
There are also , some you dont have to pay for, that will alert you to changes.
To check for inaccurate hard inquiries on your credit reports from Equifax, Experian, and TransUnion, look for a section that might include:
Requests viewed by others
You can ask to remove hard inquiries from your credit reports if you didnt apply for a new credit account, you didnt give permission for the inquiry, or the credit bureau added the inquiry by mistake.
To do so, youd write to the credit reporting agency whose report shows inaccurate information and ask the agency to remove it.
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Inquiries And Rate Shopping
When youre shopping around for a mortgage or auto loan, you want to get the best rateand you should. You might worry that having your credit checked by several lenders could hurt your credit score.
The good news is that most credit score calculations treat all mortgage and auto inquiries as a single inquiry, as long as the inquiries are made within a certain period of time. For the latest version of the FICO score, this period is 45 days.
Who Does A Hard Pull
Since a hard pull is most often used to tell if you’re a good lending risk, they are used by an entity considering you for a loan or credit card. Banks, credit unions, and credit card companies rely on hard inquiries to make sound lending decisions. They’ll look at the information listed on your report to see if you are likely to pay back the money. These decisions affect all kinds of loans, including mortgages, private student loans, and car loans.
Applying for many loans over time almost definitely brings your score down. Each pull can have an effect, depending on the timing. A flurry of credit pulls over the course of a year, for example, may signal to a bank that you are desperate for moneyâand not a solid credit risk. Make each pull an intentional action.
If you rent, your landlord can also run a hard pull, but they can sometimes just run a soft pull. The application will often ask permission to do a background or credit check, and they canât do one without your consent. If youâre not sure which one they will run, ask them.
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How Do Hard Credit Inquiries Affect Your Credit Score
When you let a bank or lender do a hard credit check on your credit report, what does that mean for that all-important, three-digit numberâa.k.a your credit score?
And how long do hard inquiries stay on your credit report? Are you permanently branded a credit-checker?
Hereâs what you need to know:
When a lender hard pulls your credit, your credit score will take a small hit regardless of whether youâve been approved or declined. According to FICO, credit inquiries tend to correlate with higher risk borrowersâand your credit score will reflect that correlation.
Why do credit inquiries correlate with riskier borrowers?
Itâs hard to pay off debt. And as you open more and more new credit accounts , it becomes less and less likely that youâll be able to pay off each and every one of your existing credit accounts. And because a credit inquiry comes along with each new credit account you open, credit inquiries are the signal that indicate youâre opening a lot of new accounts.
Back to the issue credit inquiries staying on your credit report.
All in, donât worryâcredit inquiries donât impact your credit score that much.
So, if thereâs a credit inquiry thatâs on your credit report, donât panicâit doesnât have a huge impact on your credit score. According to Tina Hay, CEO of Napkin Finance, âA hard credit pull can take off several points from your credit score, but itâs typically a 1 to 5 point impact.â
How Does Applying For A New Credit Card Affect My Credit Score
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The idea of earning free flights and hotel stays just by signing up for the right credit cards seems too good to be true, and there are plenty of myths about how it all works. When youre trying to introduce someone to the world of reward travel, you might have to dispel some of those misconceptions.
One of the most common things people believe when they start applying for new credit cards is that those actions will negatively and permanently impact their credit scores. While it is true that recklessly opening new lines of credit and abusing them can hurt your credit score, there is no long-term impact on your score from simply opening new accounts.
Since credit card sign-up bonuses are the foundation of travel rewards, today well take a look at how your credit score is affected when you open a new credit card.
New to The Points Guy? Want to learn more about credit card points and miles? Sign up for our daily newsletter.
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How Do Credit Inquiries Affect Your Credit Scores
Now you know that hard credit inquiries can have an impact on credit scores. But you might be wondering how.
According to credit-scoring company FICOÂ®, a hard inquiry can cause your credit scores to dropâusually by just a few points. Hard inquiries can stay on your credit reports for up to two years. But they might only affect your scores for a year.
Why would a hard credit inquiry cause a drop in credit scores? As the Consumer Financial Protection Bureau explains, credit-scoring models generally look at how recentlyâand how oftenâyouâve applied for credit. So a single hard inquiry may have a relatively minor impact on your scores. But multiple hard inquiriesâespecially multiple hard inquiries over a short period of timeâcould have more of an impact.
Hard inquiries can also have more of an impact on your scores if you have few accounts or a short , according to FICO.
Ultimately, as FICO explains, âThe impact from applying for credit will vary from person to person based on their unique credit histories.â
Keep in mind: Credit-scoring companies use different formulas, or models, to calculate credit scores. And there are many different credit scores and scoring models. Some credit scores even use different ranges. That means people may have more than one score out there.
Who Creates Your Credit Report And Credit Score
There are two main credit bureaus in Canada:
These are private companies that collect, store and share information about how you use credit.
Equifax and TransUnion only collect information from creditors about your financial experiences in Canada.
Some financial institutions may be willing to recognize a credit history outside Canada if you ask them. This may involve extra steps. For example, you may request a copy of your credit report in the other country and meet with your local branch officer.
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How To Minimize The Effect Of Hard Credit Inquiries
When youre buying a home or car, dont let a fear of racking up multiple hard inquiries stop you from shopping for the lowest interest rates.
FICO gives you a 30-day grace period before certain loan inquiries, like those for mortgage or auto, are reflected in your FICO® credit scores. And FICO may record multiple inquires for the same type of loans as a single inquiry as long as theyre made within a certain window. This window is typically about 14 days.
While some lenders can rely on scoring models that give you more time to shop without incurring an additional hard inquiry, you may want to stick to 14 days to do your comparison shopping, since you likely wont know which scoring model a lender relies on to generate your score.