What is a Hard Inquiry?
A hard inquiry is a credit information report that is requested by specific organizations and lenders in order to evaluate potential credit risk. If a hard inquiry is requested, it will generally cause some negative impact and reduce the amount of points on the borrower’s credit score.
Hard inquiries are conducted during background checks, credit card applications, and credit approvals, such as home or auto loans. They can sometimes be referred to as “hard pulls” or “hard credit checks.”
Hard Inquiry vs. Soft Inquiry
When comparing soft and hard inquiries, the primary differences are seen with how the information is collected, how it is used, and how consent is acquired.
A hard inquiry is a form of a credit information report that is requested by lenders and organizations in order to evaluate potential lender risk.
A soft inquiry occurs when an individual views their credit report on their own terms or when an organization views an individual’s credit report without consent.
Soft inquiries are made by individuals to check personal credit scores, while businesses use soft inquiries to gather information and pre-qualify approvals from lenders.
Unlike hard inquiries, soft inquiries do not adversely affect the individual’s credit score and do not reduce the amount of points on their account.
Acquiring a Hard Inquiry
In order for a lender or an organization to obtain a hard inquiry, they must first request the borrower’s credit information from a credit-reporting agency.
Lenders and organizations are given the freedom to choose specific credit-reporting agencies that match their overall credit score reporting preferences.
Some of the larger credit-reporting agencies that lenders and organizations get to choose from include Experian, Equifax, Innovis, and TransUnion.
Apart from the reduction of an individual’s credit score, hard inquiries result in long-term effects. Listed below are the additional credit impacts of hard inquiries:
- If used for the same purpose and within a certain timeframe, numerous hard inquiries are generally accounted for as an individual inquiry, rather than multiple ones.
- Several hard inquiries in a short period of time can become problematic to lenders because it points to the fact that the individual is opening multiple lines of credit.
- Hard inquiries are present on an individual’s credit report for about 1-3 years.
- Creditworthiness can be affected by hard inquiries.
- As time goes on, the impact of hard inquiries lessens because lenders don’t give as much weight to them.
Other Factors to Consider
The implications of a hard inquiry could be concerning to an individual and reduce their likelihood of applying for a line of credit. Apart from a hard inquiry, four other factors are considered by lenders before being granted creditworthiness.
Payment History: If and when an individual pays their debt accounts for about 35% of credit score. Lenders want to see consistency and timeliness in an individual’s payments.
Credit Utilization: Accounting for about 30% of an individual’s credit score, credit utilization is the amount of available credit that is being consistently used to make purchases.
Credit Age: Credit age refers to how long an individual’s been using their credit card, which accounts for about 15% of an individual’s credit score.
Credit Mix: Proving to a lender that an individual can manage multiple accounts, such as revolving or installment accounts, makes up about 10% of the credit score.
Hard Inquiries: The amount of hard inquiries that appear on an individual’s credit score only accounts for about 10% of creditworthiness.
In almost every circumstance, hard inquiries would not be the primary reason that an individual would be denied credit. It is important to also consider other factors, such as payment history and credit utilization, before approaching a lender.
Managing Hard Inquiries
Having hard inquiries present on a credit score can be an area of concern for some lenders. In order to reduce the impact of hard inquiries, they must be managed effectively through the following:
- Only apply for credit when it is absolutely necessary.
- Become more attentive to more crucial factors of credit score, such as payment history, credit utilization, and credit age.
- When applying for a mortgage or car loan, be sure to carry out the shopping in a short time frame to avoid stacking hard inquiry point reductions.
- Regularly check your own credit report to ensure that there are no appearances of fraudulent hard inquiries that were not actually conducted.
When applying for a line of credit, it is important to consider how to manage and reduce the overall impact of hard inquiries so that you may appear more attractive to financial lenders in the future.
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)® certification program, designed to transform anyone into a world-class financial analyst.
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