What Is a Credit Inquiry?
When someone—a potential lender, employer, landlord, insurer, or you—needs to see your credit report, that party makes an inquiry about your credit.
There are two types of credit inquiries:
- Hard Inquiries — These can have a negative impact on credit scores. A hard inquiry happens when a lender is checking your credit in order to make a lending decision, such as a bank deciding whether to approve you for a credit card or a cell phone company deciding whether to give you a cell phone contract.
- Soft Inquiries — These do not have a negative impact on your credit scores and don’t look bad to lenders. A soft inquiry happens when there is no extension of credit being considered. For example, it’s a soft inquiry when you check your own credit report or an existing lender checks your credit in a context where you’re not applying for new credit.
The next time you get a copy of your credit report, look for the section labeled “requests for credit history” or something similar. This part of the report will list the names of all of the companies that have recently requested a copy of your credit report.
The main difference between hard and soft inquiries is that creditors make hard inquiries specifically to decide whether to approve you for a loan or some form of credit.
Does Applying for a Credit Card Hurt Your Credit Scores?
The short answer is YES, but one credit inquiry will not impact credit scores very much or for very long.
According to Fair Issac Corporation, which administers the FICO credit score, most people who have one hard credit inquiry will see a reduction in their credit score of less than five points (FICO credit scores range from 300 to 850).
Each hard credit inquiry on your credit report can reduce your credit score slightly. When you have many hard inquiries (for example, more than about 4 per year) it can become problematic when applying for new cards. If you apply for a lot of credit all at once or over a short period of time, you could see your credit scores drop significantly. 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.
It’s 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 you’ve had in the past two years, even though they’re no longer factored into your credit scores.
For example, some credit card companies will automatically deny anyone with more than 5 inquiries in the past 24 month (2 years). If you have 7 inquiries in the past 2 years, but only 1 in the past year, it’s possible your credit scores could look great and only factor in one inquiry, however the additional 6 hard credit inquiries on your credit reports from more than a year ago might cause a bank to deny you for new credit.
Rate Shopping for Auto, Mortgage and Student Loans
When you shop around for a mortgage, auto, or student loan, you may end up with multiple hard inquiries. However, you’re not looking to take out 10 loans, you’re rate shopping for the best deal on one loan.
For this reason, credit scoring models are designed to include a special rules for these certain types of loans so that your scores are not penalized for multiple inquiries for the same loan. Take note that this is not true when it comes to credit card inquiries, so if you apply for many credit cards in a short period of time each inquiry will impact your credit score.
With the FICO scoring models, all auto, mortgage and student loan inquiries that are fewer than 30 days old are completely ignored. After 30 days, the model breaks inquiries into a 45 day “de-dupe” period where multiple inquires during a 45 day period are grouped together and counted as one inquiry. This process is called “collapsing.”
Credit Card Inquiries and Rate Shopping
This “shopping around” logic is not designed to work for credit cards. Applications for credit cards work much differently than applications for installment loans. With installment loans, even though you may be approved for the loan, you still have the option of choosing whether or not you want to accept the loan and take delivery of the money.
With credit card applications, if you’re approved, the credit card issuer doesn’t give you the option of choosing whether or not you want to accept the terms —the account is opened, you get the card, and it’s a done deal (whether you activate the card or not). For this reason, every credit card inquiry has the potential to become a new credit card if you’re approved, which is why credit score models count them as individual events.
Q&A Video: How Many Credit Inquiries Is Too Many?
Removing Unauthorized Inquiries
If you find hard inquiries listed on your credit report that you did not initiate, you can have them removed by making a request in writing to the lender that initiated the inquiry.
In your letter, remind the lender that you must authorize these types of inquiries under the Fair Credit Reporting Act and ask them to remove the unauthorized inquiry or to provide proof that the inquiry was authorized by you.
Or, you can dispute the item on your credit report by contacting the credit bureaus.
If your credit report shows multiple credit inquiries that you did not authorize, that could indicate that someone has stolen your identity and you should contact the credit reporting agencies as soon as possible if that’s the case.
Unlike hard inquiries, soft inquiries don’t impact your credit scores or lender decisions. Soft inquiries are informational in nature and are not directly connected to a credit decision. For example, a current or prospective employer could make a soft credit inquiry during the employment screening process.
Credit card companies creating a “pre-approved” credit card offer will conduct a soft inquiry to see whether they want to send that offer to you. Whenever you check one of your credit reports yourself, that is considered a soft inquiry.
Soft inquiries can also come from your current creditors, who periodically check your credit to see how it stands and may, as a result, make changes to your account. For example, if you have improved your credit history over time, the creditor might increase your line of credit or lower you interest rates.
If you allow your credit to get worse, by missing a payment, for example, your lender might raise your interest rate or reduce your available credit. Your auto and homeowners insurance company may also make an inquiry when it is time to renew as it sets the rate on your policy renewal.
Why Do Credit Card Issuers Pull My Credit Report Every Month?
Whether you realize it or not your credit reports are likely scrutinized often by your credit card issuers – and not just when you initially apply for an account. It is common practice at many credit card issuers to review the credit reports of their customers every single month.
As a consumer it may seem unfair for a credit card company to routinely monitor your credit reports, especially if you are maintaining on-time monthly payments, but your changes to your credit history can be an indicator of increased risk before there’s an actual delinquency on a specific account you already have established with a bank.
Why Changes in Your Credit Make Credit Card Issuers Nervous
When times get tough financially, consumers often have to make difficult choices regarding which bills get paid and which bills are put on the back burner. Typically, credit card payments wind up at the bottom of the priority list when consumers are having money problems.
After all, if someone becomes unemployed, is battling an illness, or even becomes over-extended financially it can be a struggle just to put food on the table and keep housing expenses and utilities paid. Credit card issuers want to know immediately if a customer’s credit situation changes for the worse (i.e. missed payments on other accounts, lower credit scores, bankruptcy filing, etc.).
Knowledge regarding what is currently happening on a customer’s credit report allows a credit card issuer to determine if the risk of default on the customer’s credit card account has increased. If a customer’s credit report has taken a turn for the worse then it is very likely that there will be negative consequences, even if the customer has never missed a payment with the credit card issuer directly.
Possible negative consequences include:
- Lowering of credit limits
- Raising of interest rates
- Canceling credit cards and making the full balance due immediately
Consequences of Changes to Your Credit Report
Prior to the passage of the CARD Act in 2009, credit card issuers would routinely increase customers’ credit card interest rates (for future purchases and retroactively) to the default rate if the customer had late payments on any account on their credit reports. This rate increase was often triggered even if the late payments occurred with another lender entirely and not with the credit card issuer itself. This practice was known as universal default.
The CARD Act did limit retroactive rate increases, but you would be mistaken if you believe that the practice of universal default has been completely eliminated. In fact, a credit card issuer can still impose a retroactive rate increase, but it can now only be imposed if the customer has missed payments with the card issuer directly.
Even though credit card issuers are more limited regarding universal default practices, there are plenty of other adverse actions which are still allowed whenever a customer has negative activity appear on his or her credit reports. Customers who miss payments with another, unrelated lender could still face consequences such as lower credit limits, increased interest rates on future purchases, and even account closings.
Naturally, the best way to protect yourself from universal default clauses and other adverse actions from your credit card companies is to always pay your bills on time, and in general never revolve a balance on your credit cards from one month to the next.