If you've applied for a loan or new credit recently, you may have noticed (or been forewarned) that a "hard inquiry" was made into your credit report. Inquiries are just another term for credit check, and they helps banks, lenders, and creditors determine your creditworthiness.
While there are technically two types of inquiries — hard and soft — only a hard inquiry has a negative effect on your credit score. But it's difficult to avoid a hard inquiry when you really need a loan or new credit. And thinking about what it does to your score can understandably be worrying.
But remember that your credit report and credit score are never permanent. They fluctuate over time to reflect your credit actions and behaviors. Before you worry too much, let's dive into how hard inquiries affect your credit score, and what happens when they eventually fall off your credit report.
How hard inquiries affect your credit score
The impact of a hard inquiry on your credit score depends on several individual factors, including your past payment history and how long you've had active credit accounts. While there is no one-size-fits-all answer, a hard inquiry generally results in a deduction of less than five points for most people.
The impact on your credit score also depends on the nature of the credit you're applying for.
For example, if you apply for several new credit cards, your credit score will get dinged for each application. Even though the impact of each inquiry is minor, several inquiries in a short time period can add up. The credit bureaus may see a multitude of new credit applications as a sign of financial trouble and could therefore consider you a credit risk. This can make it harder to get new credit or a loan down the road.
But it works differently if you're rate shopping for a car loan or a mortgage. Most credit bureaus understand that consumers want the best rates when making large purchases. That's why you can get several rate quotes in a certain time frame — usually between 14 to 45 days — and they will be counted as only one inquiry.
What happens to hard inquiries over time
Any negative information on your credit report — including hard inquiries — will eventually fall off. And a hard inquiry sticks around for much less time than, say, an account in collection or bankruptcy.
According to credit experts, hard inquiries stay on your report for two years, but only impact your credit score for the first year (or 12 months).
But what does this mean for your actual credit score?
Raising your credit score
Losing a few points from a hard inquiry is not the end of the world. What you should focus on instead is:
- Keeping your payment history positive. Make all your payments as expected, on time and in full, including credit card payments, monthly utility bills, and any loan payments.
- Keeping your credit balances low. If you have credit cards, try to pay them off each month. And if you do carry a balance, keep it to 30 percent or less of your available credit.
- Checking your credit report yearly. It's more common than you'd think to find errors and old information hiding in your credit report and hurting your score. If you do find errors, talk to a credit repair professional who can help you file a credit dispute.
Being diligent about the above will help you improve your score, or maintain an already-good score.
And remember: after two years, you can earn back the points you lost from a hard inquiry. But to keep your credit healthy overall, you also need to exhibit responsible behaviors along the way.