How Credit Inquiries Affect Your Credit Score

Posted on Tuesday, June 21, 2022 in Mortgage Lending

How Credit Inquiries Affect Your Credit Score

When seeking a mortgage loan, one of the significant factors taken into consideration is your credit score. Some types of credit inquiries will negatively affect your credit score.

checking credit score A “hard” inquiry is when a lender checks your credit because you have applied for a new loan, credit card, or line of credit. When this happens, your credit score will temporarily decrease. A hard credit inquiry can remain on your credit report for up to two years.

A “soft” inquiry may appear on your credit report. These inquiries typically occur when a person or company checks your credit as part of a background check. For instance, when you apply for a job, some employers will perform a credit check as part of the hiring process.

Unlike hard inquiries, soft inquiries won’t affect your credit score. Since soft inquiries aren’t related to an application for new credit, they’re only visible to you when you view your credit reports.

If you check your own credit score, this is also reported as a soft credit check, so it won’t lower your credit scores. You can check your credit scores for free through various consumer companies, such as AnnualCreditReport.com, Credit Karma or NerdWallet, as often as you like without affecting your credit scores. These tools can be valuable for monitoring your credit as you work to build your scores before applying for a mortgage loan.

Examples of hard and soft credit inquiries

Here are some examples of common hard and soft inquiries.

Hard inquiries: mortgage application, auto loan application, credit card application, student loan application, personal loan application, and apartment rental application

Soft inquiries: employment verification/background check, checking your own credit score, “prequalified” credit card offers, and “prequalified” insurance quotes.

There are other types of hard or soft inquiries that may be made by phone providers, cable companies, internet providers, streaming movie services, and utility companies. You have a right to ask those companies what type of credit inquiry they make when processing your application for services.

How many inquiries are too many?

According to the credit-scoring company FICO®, a hard inquiry will cause your credit scores to drop. Hard inquiries can stay on your credit reports for up to two years, but they might only affect your scores for a year.

credit score FICO also states that no more than 10 percent of an individual’s FICO score’s weight is determined by a person’s hard inquiries. So, a single hard inquiry has a relatively minor impact on your score, dropping it by no more than five points. But multiple hard inquiries - especially over a short period of time - could have more of an impact. Multiple hard inquiries can deplete your score by as much as 10 points each time they happen.

Multiple inquiries for some types of credit - like mortgages, auto loans, and student loans - work differently because the scoring companies distinguish these inquiries from others because they understand you are probably shopping for a loan by comparing rates and terms among lenders. If these inquiries occur within a specific time period - usually 14 to 45 days - they may be treated as a single hard inquiry.

On the other hand, if you apply for multiple credit cards in a short period, each application will add a new hard credit inquiry to your credit report.

Mortgage lenders typically have a limit on how many inquiries are acceptable. After that number is reached, they will not approve your loan, no matter your credit score. For many lenders, six inquiries are considered too many.

Final thoughts

Before you apply for a loan, establish a financial game plan. As part of that plan, review your credit reports and find out how many hard credit inquiries were reported during the past two years. If you are shopping for a mortgage loan, do all your rate shopping in a condensed period to minimize the impact on your score.

As part of your planning process, visit with one of First National Bank’s mortgage lenders to understand the bank’s lending requirements. First National Bank offers no-cost, no-obligation mortgage lending consultations.

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