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If you know anything about personal finance and credit cards, you’ve probably heard the terms “hard” and “soft” credit inquiries. But what exactly is a hard credit inquiry? And what exactly does it do to your credit score?
A hard credit inquiry is an inquiry which negatively impacts your credit score, usually by about five points for approximately six months. These credit inquiries are an indication to creditors that you are seeking credit — perhaps for a house, car or a vacation — and you may be a poor credit risk. (After all, you’ve heard the old adage that credit is more easily extended to people who don’t need it!)
Interestingly, the term is nowhere to be found on the FICO website; it’s a phrase invented by credit management and personal finance experts to describe a credit inquiry that temporarily hurts your credit score.
When Do You Need a Hard Credit Inquiry?
Some common reason lenders may make a hard credit inquiry (also called a “hard pull,” because creditors are pulling your credit file) include:
- Applying for a mortgage
- Getting a car loan
- Applying for a new credit card
- Getting a personal loan
If you run a small business, you will probably get a hard inquiry if you sign up to accept credit cards through a credit card agency. Some e-commerce sites also do a hard credit inquiry before you sign up to accept credit cards through their website.
Beware of “Hidden” Hard Credit Inquiries
There are other reasons lenders, banks, housing associations and other businesses might make a hard inquiry on your credit. Be aware of the hard credit inquiries that you might not think about. Some examples of such credit inquiries include:
- Having utilities turned on
- Signing up for a new cell phone plan
- Applying for a job
- Buying a condo or co-op with a homeowner’s association
- Renting an apartment
- Signing up for overdraft checking at your bank
- Signing up for a checking account at some banks
The Good News About a Hard Credit Inquiry
Although you’ll experience a hard credit inquiry whenever you apply for new credit or do a number of other things related to your financial status — where lenders want to make sure you are a good credit risk — no one can run a hard credit check without your permission. This means you’ll always know when it’s happening.
There’s more good news, too. If you have multiple hard credit inquiries all for the same credit, loan or purchase within two weeks (for instance, when you’re shopping around for the best rates on a mortgage or care loan), these inquiries count as one single inquiry. In this case, your credit score will take a slight hit during the mortgage approval process, but probably not enough to affect the interest rate on your new mortgage.
How to Manage Hard Credit Inquiries to Keep Your Credit Score Up
Finance experts recommend keeping your hard credit inquiries down to one or two per year, to minimize the impact on your credit score. If you plan to get a few new credit cards, apply for all of them within a two-week period to minimize the damage to your credit score. (Of course, opening multiple new accounts at the same time will also negatively impact your FICO score).
Of course, certain life situations, such as buying a house or moving, may require more hard credit inquiries. If you know you’re moving, minimize other credit inquiries before the move — don’t apply for any new charge cards, buy a new car with a secured loan, or do anything else you don’t need to do. Shop around when you select a new bank, because not every bank does a hard credit inquiry.
Hard credit inquiries are a necessarily evil when it comes to managing your credit, but the impact to your score isn’t as bad as it seems and there are ways to minimize it.