Hard Inquiry

A hard inquiry, also known as a hard pull or hard credit check, is a credit report check that occurs when a prospective lender reviews a consumer’s credit report to make a lending decision. Unlike soft inquiries, which may occur without a potential borrower’s explicit permission and do not affect their credit score, hard inquiries have a direct impact on the credit score of the individual. When a consumer applies for new credit, such as a mortgage, credit card, or auto loan, the lender will perform a hard inquiry to evaluate the consumer’s creditworthiness. This evaluation helps the lender determine whether to approve the loan application and the interest rate to offer.

How Hard Inquiries Work

When a potential borrower gives a lender permission to check their credit report, the lender submits a request to one or more of the major credit reporting agencies: Equifax, Experian, and TransUnion. The agency then provides the lender with a detailed credit report that includes the borrower’s credit history and credit score. This type of inquiry is known as a hard inquiry because it requires explicit consent and is triggered by a credit application.

Hard Inquiries and Credit Score

Hard inquiries can cause a slight drop in a borrower’s credit score. One hard inquiry might reduce the score by a few points, but multiple hard inquiries in a short period can have a compounding effect. This decrease occurs because the inquiry suggests that the borrower is seeking new credit, which increases the potential risk involved. However, credit scoring models such as FICO and VantageScore typically account for rate shopping, for example, when applying for auto loans or mortgages. If multiple inquiries for the same type of loan occur within a short time frame (typically 14 to 45 days), they are often treated as a single inquiry to mitigate the impact on the credit score.

Impact on Different Scoring Models

Different credit scoring models handle hard inquiries in distinct ways, and the impact can vary. For instance:

• FICO Score: FICO scores, widely used by lenders, typically treat hard inquiries differently based on the type of credit application. Multiple inquiries for auto loans or mortgages within a 14-45 day window count as one single inquiry. The exact impact on the FICO score depends on the overall credit profile.
• VantageScore: VantageScore, another major credit scoring model, also considers the context of hard inquiries. Similar to FICO, it may consolidate multiple inquiries related to auto or mortgage lending within a short time frame, reducing the impact on the credit score.

Duration of Impact

A hard inquiry stays on a credit report for two years but only affects the credit score for the first 12 months. After this period, while the inquiry remains on the report, it no longer impacts the score.

Situations that Trigger Hard Inquiries

Several common financial activities can lead to hard inquiries, including:

• Applying for Credit Cards: Every time a consumer applies for a new credit card, the issuer performs a hard inquiry.
• Loan Applications: This includes mortgages, auto loans, personal loans, and student loans. Each application results in a hard inquiry.
• Requesting a Credit Limit Increase: Consumers who ask for a higher credit limit on an existing revolving account may trigger a hard inquiry.
• Renting an Apartment: Some landlords or property management companies perform hard inquiries during the tenant screening process.
• Utilities Applications: Setting up new services such as electricity, gas, or telecommunications may sometimes involve a hard inquiry.

Managing and Minimizing Hard Inquiries

Consumers can manage the impact of hard inquiries on their credit score by following best practices such as:

• Limit Applications: Only applying for credit when necessary can help limit the number of hard inquiries.
• Rate Shopping Window: When shopping for auto loans or mortgages, conduct all inquiries within a short time frame to ensure they are treated as a single inquiry by scoring models.
• Monitor Credit Reports: Regularly reviewing credit reports helps ensure accuracy and identify any unauthorized hard inquiries. Consumers can get free copies of their credit reports annually from AnnualCreditReport.com.

Conclusion

Hard inquiries are a fundamental part of the lending process, serving as a check on a potential borrower’s creditworthiness. While they can have a temporary effect on the credit score, understanding how they work and how to manage applications can mitigate their impact. Consumers should be mindful of the contexts that trigger hard inquiries and take strategic steps to maintain their credit health while pursuing new credit opportunities.