A hard inquiry on your credit will likely cause your credit score to drop points. Depending on your current credit situation, you might lose more or fewer points. According to FICO though, you can reasonably expect your score to decrease by 5-10 points. This type of credit check or “credit inquiry” can show up on your credit reports as well. What even is a hard credit inquiry and why does it sound so bad? Well, let’s explore it some more.
Let’s start off with the basics and define what a credit inquiry is. According to the Consumer Financial Protection Bureau, “an inquiry refers to a request to look at your credit file.” Anytime you try to get new credit or get a new loan, your lender will want to know if you are trustworthy enough to lend too. No one likes to lose money, so lenders will do their due diligence when making this decision. They will want access to your credit file so they can see any relevant information about you and your ability to pay back loans and credit. This request for access is the inquiry. Once the inquiry is approved, they will then have the liberty to look at anything from your credit report to your credit score.
A hard inquiry is one of these types of checks on your credit. These are also called “hard pulls” on your credit. Whenever you are trying to get any substantial loan or credit such as a mortgage loan or a credit card, your lender will perform a hard inquiry. Other times they would do this would be for an auto loan, a student loan, or when applying to rent an apartment or house. Again, these hard inquiries show up on your credit report and impact your credit score. When one of these inquiries takes place, your credit report will show the inquiry, who performed it, and for what type of loan or credit it was for.
For whatever reason, hard inquiries tend to linger on your credit report for some time. They can take around 2 years to come off of your credit report. This is one of the reasons why you should get loans and new credit sparingly. Too many hard inquiries on your credit won’t look so great to new lenders!
Not all credit checks are the same. In fact, there’s a chance someone has performed an inquiry on you that you didn’t even know about. There are really two types of credit inquiries that exist. You know about a hard inquiry, but want to guess what the other one is? Yep, it’s a soft inquiry. Sorry to throw you a curveball there.
Like I mentioned, hard inquiries are mostly used by lenders that you’re seeking a loan or credit from. By performing a hard inquiry on you, they are able to have access to important information on your credit. Again, these can lower your credit score. You also need to give permission to lenders to perform these. On the other hand, a soft credit inquiry or “soft credit pull” is performed by people you aren’t seeking loans or credit from. Even though soft inquiries can provide the same information as hard inquiries, they do not lower your credit score. They are often just used for small checks or updates on your credit. Insurance companies and employers like to perform these on their clients or workers. For example, your employer might do a brief check on its employee’s credit scores annually. Since these soft inquiries have nothing to do with you applying for a loan or credit, you do not have anything to worry about.
Hard inquiries are somewhat strange. Most of the time they are required but they still lower your score. This isn’t the only thing that can happen, however. While in the grand scheme of things these hard inquiries are pretty inconsequential, they can still cause an impact if you don’t pay attention. Let’s look at some of these impacts so we can understand hard inquiries some more.
To reiterate, hard inquiries can lower your FICO credit score anywhere from 5 to 10 points. While this seems like nothing, 5 to 10 points could end up being a deal breaker. Some companies look through thousands of loan and credit card applications every day. To make the process go by faster, they might only look at your credit score. They might have a threshold that if you are even one point under they won’t lend to you. According to credit.org, a good credit score ranges from about 680-740 and the threshold of a good score usually is about 700 points and above. If you’re trying to get a loan from a company that has a strict threshold of 700 points, a 5 or 10 point decrease could put you below that line and you could be denied an important loan.
Why do hard inquiries even affect your credit score? Why does someone looking at your credit hurt your credit score at all? Lenders don’t necessarily want to see that you have taken out a lot of loans or credit. While paying them off properly can show you can be trusted, constantly taking out new loans and credit could rub your lender the wrong way. They can see this as you being unstable. Constantly needing loans or credit could mean that you are always behind and needing money. Because of this, credit bureaus have made their algorithm lower your credit score every time you have a hard inquiry on your account. It’s up to you to prove that you can be trusted. To your lender and the credit bureaus, you are guilty until proven innocent.
While many other things lower your credit score more than hard inquiries do, they still shouldn’t be ignored. Hard inquiries aren’t exactly avoidable though, so try to only get them once in a while. If you have had 4 inquiries over the past year your score could be down as much as 40 points until it goes away!
If a lender deems you are not very trustworthy or that you might not be able to pay back your loan, they will often charge you more interest or not give you the entire amount of the loan you asked for. This might seem unfair, but lenders do this to make some of the losses back from untrustworthy borrowers defaulting on their loans. Like you’ve read, having a hard inquiry on your credit account not only doesn’t look great but it also lowers your credit score. If you already don’t have a great score to begin with your lender might pool you into the “untrustworthy” category.
You might get pooled into being a riskier, more untrustworthy borrower category for many reasons. Whatever the reasons, if you are looking for a new loan or line of credit your lender will give you worse conditions than if you were considered a trustworthy borrower. You can expect higher interest rates and maybe even a smaller loan amount than you were expecting. This could mean that you end up paying more money for getting less money than you otherwise would have. An Interest rate increase might not hurt you too much but it could also make the loan unaffordable if you are in a tight situation financially.
While there are probably more reasons why you’d get charged a higher interest rate or receive a smaller loan, a hard inquiry on your account doesn’t help. With every hard inquiry, your account looks less trustworthy and you could end up falling into a cycle of bad loans.
Credit inquiries are just a part of getting loans and credit and you can’t exactly avoid them. However, if you don’t strategically space your inquiries out the negative consequences will snowball. Just think about it, if you are having 4 or 5 inquiries a month your credit score could be down as much as 100 points in two months. Your lender will look at this as a red flag. This shows your lender that you might be desperate for loans or that you are trying to take out loans and credit to pay for your existing loans and credit. This is not something a lender wants to see when lending you money. Try to space out your inquiries instead. Remember, these inquiries don’t go away for nearly 2 years. Having a few inquiries spread out over many months or a year will make you appear much more stable to your lenders and you will have an easier time getting favorable loans.
If your credit score sits around the high 600’s or low 700’s, every point for you counts. A few small decreases of 5 to 10 points can put you in a position where you can’t get loans or the loans you get are much less favorable for you. However, having hard inquiries on your account when you have strong credit is much easier to handle. This is why it’s important to do everything you can to build strong credit so you can take these hits. Losing 5 to 10 points on a good score really won’t affect you that much. Your lender will see these hard inquiries as just a consequence of you seeking a loan instead of you being desperate or untrustworthy. Let’s dive into some of the things you can do to help build strong credit.
Consistently making your loan and credit payments on time is one of the best things you can do for your credit. Your payment history is your single biggest factor for your credit score. This shows your lender that you can be trusted to pay regularly and on time. This is one of the easiest ways to get trust from a lender so that they’ll lend you more money and with better terms. While making a one day late payment doesn’t really affect your credit score, anything after 29 days can really hurt you. These late payments can stay on your credit report for 7 years and you could drop up to 100 points on your score. Do everything you can to make sure you pay on time so you can avoid all of this and build your credit up!
A low credit utilization rate is basically just how much of your credit you use in a month. If you have $1,000 of credit and you use $700 of it, your credit utilization rate would be 70%. While it’s fine to use your credit, (that’s why it’s there for you) it’s a good practice to keep your credit utilization rate under 30%. Behind your ability to make payments on time, your credit utilization rate has the second biggest impact on your score. If you have a really high utilization rate it can hurt your score. Try to use other methods of payment before you use your credit card. This way, not only will your rate be lower but you’ll be able to make payments easier.
At Possible, we aren’t like traditional payday lenders. Unlike our competition, repaying your loans helps build your credit score. We offer payday loans and installment loans to our customers in a way that is more manageable for our customers. By making your payments on time with us, we can report to the credit bureaus and help your score go up over time. We don’t want to see you behind on your payments and losing points on your credit score. We offer competitive APR’s and we allow our customers to extend their payments up to 29 days right within our app. We want to be an easy, useful, and transparent lender in an industry full of predatory practices.
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