When you work to improve your credit, every little bit matters. That’s why you work hard to pay off debt. You pay attention to how you manage your credit. You sacrifice some short-term pleasures for long-term freedom. You feel proud of the work you’ve done.
But, when you check your credit score you realize that it has gone down.
The culprit might be a hard credit inquiry.
What Is A Credit Inquiry?
The reason for your credit score going down could be because someone did a credit inquiry against your account.
A credit inquiry (or, credit check) occurs when someone asks to check, or “pull”, your credit file.
There are two types of inquiry: a soft inquiry and a hard inquiry. Your credit score can go down depending upon the type of inquiry done.
The Two Types Of Credit Inquiry
A soft inquiry (also known as soft pull) doesn’t change your credit score at all. It happens when you do a credit check on yourself. Also, when an existing creditor pulls your report to review your account.
A hard inquiry (also known as a hard pull) causes your credit score to drop. It happens when you let a lender see your credit report.
The hard inquiry can drop your credit score, especially if they come from multiple lenders over a short period of time because it shows you are actively looking for credit. That is a sign to lenders that you need quick money and may not be a good risk.
The exception is if you are “rate shopping” for the same type of credit – like comparing interest rates on a mortgage or auto loan. The FICO system is programmed to recognize “rate shopping” when a set of similar hard inquiries all occur in a period of about 4 weeks or less.
Why A Hard Inquiry Can Be Bad For Your FICO Score
Here’s how a hard inquiry can affect your credit score (what we call your FICO score).
When you apply for a loan or credit card, the lender must pull your credit report to determine the risk. The inquiry can have a small impact on your FICO score – less than five points. But, if you have few accounts or a short credit history, then the inquiry will have a greater effect.
Also, many inquiries in a short amount of time is a red flag to lenders. It means that you are low on cash and could be at risk.
Your FICO score is calculated using the inquiries from the last 12 months.
How a Hard Inquiry Can Cost You $18,516
Suppose you are looking for a new home and you are shopping for a loan. You want to take out a 30-year mortgage for $200,000. A typical mortgage rate chart would look like this:
Here’s where a hard inquiry becomes a problem.
If you had a 661 FICO Score you would have an interest rate of 4.398%. After a hard inquiry, your FICO Score would be about 658. Now your interest rate is 4.828%. Over the life of your 30-year loan, you will pay an extra $18,516 of interest!
4 Surprising Reasons Why a Hard Inquiry is Posted Against You
Applying for a credit card and/or loan are obvious ways to trigger a hard inquiry. But, there are some not so obvious causes of a hard inquiry:
1 – Renting a car with your debit card
Not all car rental agencies allow you to pay with a debit card. But, those that do have in the rental agreement a sentence that allows them to check your credit. This posts a hard inquiry on your credit report.
2 – Getting a new cell phone plan
Before a phone provider will give you a contract they will do a credit check. They want to know if you can pay your phone bill. This creates a hard inquiry on your credit record.
3 – Requesting a credit limit increase
This one depends on who began the process of the credit limit increase. If the creditor decides to increase your credit limit, it will do a soft inquiry. But, if you request a credit limit, then a hard inquiry is performed.
4 – Getting a business credit card
Some corporate credit cards require a personal guarantee. This covers the credit company if someone expenses things that are not covered by the business. These credit card companies will pull your credit file and cause a hard inquiry.
Keep Your Credit Report Clean
Hard inquiries can show up on your credit report without you knowing it. These are hard inquiries that have not been authorized. These are not good. They may be signs of fraud.
Be on guard against these unauthorized inquires. Review your credit report often and be on the lookout for unauthorized inquires.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.