What Are Credit Inquiries And How do they affect your credit score?
Every time you apply for credit, you permit the lenders to “inquire” or request your credit history or record. These are called credit inquiries. Additionally, each time a company pulls a credit report from an application you had submitted, a record of the inquiry is listed in your credit report. Each of these inquiries forms about 10% of your credit score.
Since they affect your credit scores significantly, it’s best to know how they work and how they impact your credit scores more thoroughly.
In what situations can a business ask for a credit inquiry?
Businesses can’t always ask for a credit inquiry unless they have a valid reason. According to the FCRA or Fair Credit Reporting Act, companies have a legitimate reason to ask for a credit inquiry. Here are some legitimate reasons to request someone’s credit history:
- To grant loans: If you have requested a loan, credit card, or other similar credit-based services, the company has every right to demand a credit inquiry to determine whether to pass your application.
- To collect debts: Third-party lenders also have permission to verify your credit history and personal information, such as contact details and address, to collect the debt when the time comes.
- Government licenses: If you have applied for some government license, they might check out the credit history to test your credibility.
- Employability: Some companies request your credit history before letting you join them to ensure you are a good fit. This especially applies to candidates applying for financial positions.
Companies that obtain your credit history with false claims or use it illegally would violate Federal Law. In addition, it gives you the right to sue the company.
How Many Types of Credit Inquiries Are There?
There are two types of credit inquiries; both are treated differently. So, they either affect your credit scores or aren’t concerned with your credit score.
Hard inquiry: When a company requests a credit inquiry due to an application you had filled, it’s called a hard inquiry. These are the only kind of credit inquiries that count in your credit scores.
Soft inquiry: While reviewing your credit reports, you might notice credit inquiries from companies you had never contacted. These are generally from companies who have checked your information to see if you might be interested in their goods or products. However, sometimes potential employers or companies you already have credit run a soft credit check that doesn’t affect your credit scores.
The credit history that companies receive upon request contains the credit history for the past 24 months. This version only includes hard inquiries, so you have nothing to worry about.
How do credit inquiries affect your credit scores?
Lenders request credit inquiries to gauge if you will default on your loan. If it shows too many credit inquiries, they will assume you are heavy in debt. This lowers the chances of your loan or credit application getting accepted.
Too many credit inquiries also reduce your credit score. This would affect any loan applications you might file out in the recent future.
If you are enquiring about the best interest rates on mortgages or vehicle loans, you will probably end up getting a lot of credit inquiries. Fortunately, credit inquiries of the same kind are listed as a single inquiry if requested within a certain period.
As for points, a hard inquiry could take off around 5-10 points off your credit score. On the other hand, though they appear in your credit reports, soft inquiries don’t affect your credit scores.
Suppose you are worried about your credit score and looking for cash loans. In that case, some direct lenders offer various personal loans by carrying out soft credit checks that neither appear in your credit history nor affect your credit score.