There are two ways that lenders or other parties can inquire: it can be a soft inquiry or a hard inquiry. A hard inquiry is an application for new credit, such as when you apply for a new loan or credit card. A soft inquiry, on the other hand, happens when someone is checking your credit but not considering you for new credit. This includes when you check your own credit or when a potential employer checks your credit for example.
Do Hard Inquiries and Soft Inquiries Affect Your Credit Score?
The key difference you need to know about between hard and soft credit inquiries is that hard inquiries can affect your credit score while soft inquiries don’t. Hard inquiries can slightly lower your credit score, depending on how many inquiries you’ve had over the past 12 months and what else is reporting on your credit reports.
Keep in mind that each credit bureau has its own slightly different formula for calculating your credit score. While they don’t divulge all the specifics, we do know that a hard inquiry will affect your score very little if at all. You won’t typically see a significant drop unless you have more than two hard inquiries within one year.
A note to remember: hard inquiries stay on your credit report for two years but they only affect your score for the first year. Don’t worry if you see hard inquiries that are more than one year old.
What Does That Mean for Loan Shopping?
As we mentioned, applying for multiple sources of new credit will eventually lower your credit score because it’s seen as a sign that you may be looking for more credit than you can afford. But there’s one situation in which it makes sense: applying for mortgages or other types of loans with multiple lenders so you can compare rates and choose the best one.
Fortunately, “loan shopping” in this way won’t affect your credit score the way all those hard inquiries normally would. When FICO is running your credit score, for instance, they ignore all inquiries from the past 30 days. This means that if you apply with five lenders within 30 days, you won’t get a lower score each time because of the previous inquiries.
FICO also groups multiple hard inquiries in a short time for the same type of loan product into one inquiry. So those five loan applications would only affect your credit score as much as a single hard inquiry would.
Notice that we said “in a short time” – this exact timeframe can vary. Older FICO scoring formulas use 14 days while the new FICO formula uses 45 days, but lenders can choose either one when they run your credit score.
There is one important caveat for this rule, though: it doesn’t apply to credit cards. It only applies to loans and other types of credit. Each credit card application is a separate hard inquiry, regardless of how close together they are.
Tips to Protect Your Credit Score from Excessive Credit Inquiries
Credit inquiries aren’t meant to be a major factor in your credit score but too many of them can add up and do measurable damage. Follow these tips to keep your credit score high:
- Track how many inquiries you’re making. Have a note on your phone or at home where you jot down any hard inquiry along with the date so you can see when they’ll stop affecting your credit score.
- Some circumstances, like applying for a new apartment, can result in either a hard or soft inquiry depending on how the lender (or landlord) runs the credit check. Always ask in advance so you can track and plan accordingly.
- Research credit cards before applying for them. Because every credit card application affects your score, shop around by researching the cards in advance. Learn about their average interest rates and the typical minimum credit score they’ll accept. Remember that the hard inquiry will still be on your credit report if you’re rejected for the card.