For this weeks installment of Credit Tip Tuesday we'll look at credit inquiries. Any time that you or a business entity requests a review of your credit report it is considered an inquiry. Some of these inquiries can have a temporary negative effect on your FICO score. Others do not hurt your score at all. You'll sometimes hear people in the business differentiating them between hard and soft inquiries. Hard inquiries are the ones that hurt your score. So what is the difference?
A hard inquiry occurs when you apply for credit:
Whenever you decide to open a new line of credit the creditor will run you report to see if you qualify. A credit inquiry is added to your credit report when this happens. Whether it is a credit card, a store credit, a car loan, if a person or business requests to view your credit report because you are applying for credit it is a hard inquiry. So does it hurt you to shop multiple lenders for the same loan? The answer to that in the case of mortgages and auto loans is no. The FICO algorithm recognizes multiple inquiries in the same category as the consumer requesting one loan. Often a car dealership will send your application to separate banks, all pulling your credit at the same time. You could imagine if all those inquiries were considered separate that it would have a incredibly negative effect on your score. The same holds true for mortgages. Multiple mortgage inquiries within 30 days will not reflect negatively any more than one inquiry for a mortgage.
A soft inquiry occurs when your credit is reviewed for something other than the purpose of extending you credit:
A consumer inquiry is when an individual reviews their own credit report. No matter how often you pull your credit to review it you are not hurting your score with inquiries. You can go to www.annualcreditreport.com to get a free copy of your report from all three credit reporting bureaus. If you wish to get a report with your score you are able to do so for a small fee. With the rapid growth of identity theft it his highly recommended that you check your credit reports regularly. Other types of soft inquiries are promotional inquiries, when companies are sold your information and review your credit so they can advertise a certain program they have that may fit you. This credit was not requested by you so it doesn't hurt your score. If you're wondering why companies can do that I suggest you actually take the time to read privacy policies that are issued with every extension of credit. Another common soft inquiry is when your credit is requested by an employer as part of a background check. Again, this won't cause any damage to your credit score.
Credit inquiries reduce your score for 12 months but it is a minimal reduction as long as you don't have too many. If you're applying for dozens of credit cards you will see a much bigger reduction in your score than if you're shopping for an auto or home loan.
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