How Credit Inquiries Affect Your Score

NEW YORK (MainStreet) — Are credit inquiries sinking your credit score? They might be.

While there are a number of factors involved – “hard” versus “soft” inquiries are at the top of that list – not every inquiry hurts. But those that do can hurt pretty bad.

First, let’s define “credit inquiry.” Anyone who examines your credit, for whatever reason, is conducting a credit inquiry. Using credit industry averages, inquiries only comprise about 10% or less of a person's credit score. But such inquiries aren't alike, and it really depends on what the inquirer is looking for.

To understand what an inquiry might turn up, let’s compare the hard versus soft credit inquiry.

Hard credit inquiry (“below the line” inquiry)

This is any attempt on your part to acquire financing that could potentially increase your debt. A mortgage for a new home, a loan to buy a new car, or a new application for a credit card would result in a hard credit inquiry. That’s because any financial move toward credit that could impact your credit score – good or bad – means you’re a candidate for a hard credit inquiry. So even an apartment rental, which results in a monthly financial payment, is considered a hard one and could impact your credit score.

Soft credit inquiry (“above the line” inquiry)

Soft inquiries usually don’t lead to any impact on credit. If you’re looking to open a bank account or apply for a new job, you may see your credit officially reviewed by the bank or your potential employer. Also, if you check your own credit report (many do via AnnualCreditScore.com, a credit report that is free to Americans once every year) it will be considered a soft inquiry. Those shouldn’t lead to any negative impact on your credit score.

We know credit providers can trigger a hard or soft credit inquiry, with the former potentially impacting your score and the latter a safe bet not to. But what damage can one of those hard credit pulls mean to your credit score?

One hard credit inquiry usually results in a one to five point decline in your credit score, depending on all the other factors in your credit history that affect your current score. If you haven’t racked up much of a credit history and have only a few accounts on your credit report, a hard inquiry can result in a bigger decline in your score. If you own a home, have three credit cards, and have lots of other credit accounts, a hard inquiry may not penalize your credit score all that much.

Time, to an extent, is on your side here. The major credit bureaus - Experian (Stock Quote: EXPN). Equifax (Stock Quote: EFX), and TransUnion – won’t penalize consumers who are shopping for big ticket items like a mortgage or a new credit card – within reason. Such “rate shoppers” can feel free to check around for multiple deals, but only within 30 days. The credit bureaus do treat multiple inquiries within a 30-day period as only one inquiry, although that can still lead to a minor decline in your credit score.

Keep that in mind, but also remember that a five point drop in your credit score is a small price to pay to find a great mortgage or a low-interest credit card. It’s just the price we pay for good credit.

How low your credit score can go? Find out on MainStreet.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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