Did you know there are two types of credit inquiries, and that only one of them has an effect on your credit scores? Read on to learn about hard credit inquiries, and why how they can impact your credit scores.
What Is a Hard Credit Inquiry
A hard credit inquiry occurs any time you apply for credit. Every application for credit you make can result in a hard credit inquiry, and every hard credit inquiry can take up to five points off your FICO® credit scores.
The main thing to understand about hard credit inquiries is that they’re the result of a voluntary action on your part to obtain new credit.
The trouble with hard credit inquiries is when they start to add up. If you apply for new credit on a regular basis, you could appear to be desperate for credit to make ends meet. This idea comes from past data collected on credit reports. Here’s an explanation from myFICO:
“Large numbers of inquiries also mean greater risk: people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.”
In other words, piling on too many inquiries could indicate risky behavior, even if you’re more than prepared to handle whatever new credit you take on.
How to Minimize the Effect of Multiple Hard Credit Inquiries
If you’re worried about the effect multiple applications might have on your credit scores, you can minimize that effect by only applying for credit when you need it, and rate shopping responsibly when you do. Here’s how:
- When you want to submit multiple loan applications to see who’ll offer the best rates, apply for the same amount of money each time. This can help show that you’re not planning on accepting every loan but are in fact looking for the one with the best terms for you.
- At the same time, you should also only apply for one type of loan at a time. It’s not a good idea to rate-shop for a house and rate-shop for a car at the same time unless you absolutely must, as rate shopping for both can result in more hard credit inquiries.
- Finally, your rate shopping should occur within a short time frame, ideally 14 days. This is the amount of time credit scoring companies have designated as a typical rate shopping period, and during which they’ll consider multiple applications for the same type and amount of loan to be only one hard credit inquiry.
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