You have probably had people caution you that anytime someone checks your credit score it will negatively impact your credit. While this issue is more complicated than it seems, there is some truth to this advice.
Your credit score is affected in part by the number of inquiries made into your credit history. If you’re looking for an auto loan or mortgage specifically, some credit score models will allow for some level of shopping around by essentially viewing multiple inquiries within a certain time period as just one.
There are different categories of inquiries and some count while others do not. The credit bureaus that collect and score your credit call these two types hard and soft inquiries. Hard and soft credit inquiries are both requests to view your credit by retailers, financial institutions and other lenders. While both types of inquiries appear on your credit report, only you can see your soft inquiries, and anyone who requests your report can view your hard inquiries.
A soft credit inquiry is a more routine check that can be done without your permission. A common example of a soft inquiry is when a lender you’re currently doing business with checks your credit to make sure you’re still creditworthy. You can also trigger a soft inquiry yourself if you check your own credit.
If you are pulling your credit yourself, the credit bureaus assume that you are using the information for your own personal use and it does not reflect a desperate need for credit sources on your part. You can obtain a copy of your credit report for free from each of the three credit reporting agencies once a year. You can check it more often, but you will have to pay a small fee.
A hard credit inquiry occurs when a potential lender examines your credit report and uses that information to decide whether to extend an offer for credit. For instance, if you apply for a home mortgage or a car loan, your lender will make a hard inquiry of your credit to help determine if you qualify for the loan.
Hard inquiries are the kinds that do have the power to bring down your credit score. Credit bureaus will ding your score for these inquiries because they reflect a greater need for credit.
Knowing the difference between soft and hard credit inquiries will hopefully give you some peace of mind when it comes to your credit score. Too much hunting around for the best terms on a new line of credit could be harmful to your credit score. However, if you go about the process responsibly, you can achieve the benefits of comparison shopping without causing undue damage to your credit profile. All you have to do is be cautious and shop wisely.
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