When you apply for a new credit card or loan, the lender goes through a process to make sure that you are not a credit risk. They check your credit report and try to find any signs that you might be a risk to the business or organization that provides the loan.
What’s a Hard Credit Inquiry?
When a lender sends you information about an application for a credit card or loan, they might also send you information about whether or not you are at risk for applying for credit. To make sure that you’re not at credit risk, they might send you a hard inquiry — a “soft inquiry.” It’s important to understand what these two are and why they matter.
- A “soft inquiry” tells the lender that the person requesting the loan or credit card has a great credit score, but not so great a debt ratio (debt-to-income). The lender is checking to see if the applicant could default on the loan and if the applicant has a high debt-to-income ratio.
- A “hard inquiry” tells the lender that the person requesting the loan or credit card has a poor credit score, but not so poor a debt ratio. The lender is checking to see if the applicant has a high debt-to-income ratio and if the applicant has defaulted on credit in the past.
What exactly is a soft credit inquiry?
In the commercial and automotive lending industries, lenders sometimes do not need to access your credit score to process a loan. The application process doesn’t require a hard credit inquiry and you’re not being asked to provide verification. Instead, the application does not need to include the credit score.
Should you worry about a hard credit inquiry?
No. If the lender says that a “hard inquiry” is a negative indicator, it means that you’re still a great candidate for the loan or loan application. You will probably get a hard inquiry if you are applying for a new credit card or loan or if you are applying for a mortgage or car loan.
For this reason, there are some things you can do to minimize the damage from a hard credit inquiry. These are:
- Pay your credit cards down to their balance limit. Ideally, you should keep your credit card balances as low as possible. Lenders want to see that you can pay back your card bills, so make sure that you use your credit cards for as little as possible. Paying down your credit cards can have a positive effect on your credit score.
- Get your credit report once a year and correct any errors that the credit reporting agency found. As with any other credit inquiry, check to see if there is a hard credit inquiry against you.
- If the credit reporting agency sends you a hard inquiry, this is not an indication that you have a poor credit score. Instead, this is a sign that you were denied a loan or credit card because your score wasn’t good enough.
- If the credit reporting agency sends you a soft inquiry, this is not an indication that you have a good credit score. Instead, this is a sign that you were denied a loan or credit card because your score was good enough. Hard inquiries can also be an indication that you’re a higher risk to the credit company than a “soft inquiry.” For example, if you had a new line of credit, you might be asked to provide a hard inquiry as part of the application process.
Here’s a helpful checklist of things you can do to minimize the damage from a hard credit inquiry:
- Sign up for automatic credit reporting every year. If you pay your bills on time, you’re less likely to have credit inquiries.
- Never apply for more credit than you need. If you need a loan to buy a car, or a new credit card to fly to Florida for the holidays, then you might not get approved, but there’s nothing wrong with keeping a small line of credit available.
- Consider using a credit builder credit card. A credit builder card is a credit card that offers you rewards for paying your bill on time. You can pay off your bill each month, and then earn points or cashback that you can use to buy things.
- Monitor your credit score with a credit monitoring service. You can find a free online credit monitoring service by searching “free credit monitoring” or “credit monitoring service.”
- If you’re already making a serious effort to pay off your debts, and you are worried about a hard credit inquiry, it might be time to contact a credit repair agency. You might also consider joining the National Foundation for Credit Counseling. NFCC is the leading nonprofit organization of its kind dedicated to helping consumers get out of debt and build healthy credit.
Why is a soft credit inquiry better?
For example, a bank could potentially make you an offer for a loan without having to know your FICO credit score. This type of soft inquiry allows the lender to take you as you are instead of basing the loan decision on a single credit score.
However, a soft inquiry is not a sign of good credit. It doesn’t indicate any sort of credit issues or previous payments. It simply means that the lender is looking to ensure that you meet the criteria for the loan you are applying for.
Why is a hard credit inquiry better?
A hard credit inquiry is a meaningful sign of credit quality. A lender should always conduct a hard credit inquiry on a borrower when a loan application is complete and the loan is likely to be accepted.
If a lender does not require a hard credit inquiry, it may mean that the borrower has a good credit score, but still needs more information to prove that he or she is creditworthy.
Why do banks use a hard credit inquiry?
To give themselves as much control over the loan process as possible, many banks conduct a hard credit inquiry when an applicant has a good credit score and is approved for a loan. They might then use the credit score to decide who to approve for additional credit. If a loan applicant has an excellent credit score and is rejected for a loan based on a soft credit inquiry, it can be an indication that the loan applicant may not be creditworthy.
This is why hard credit inquiries are often considered an important part of your financial well-being. By opening a dialogue about your credit history with your loan application, your loan company is able to ensure that you are the best candidate for the loan, rather than just looking at your FICO score.
Why do banks use a soft credit inquiry?
Some lenders may still conduct soft credit inquiries when there is still uncertainty about the borrower’s creditworthiness. Lenders also often conduct a soft credit inquiry to decide if a borrower is a good fit for their lending program. For example, a retail lender may want to make sure that the borrower has a good credit history before making a loan. If a lender cannot easily verify that a loan applicant is creditworthy, it can sometimes be safest to wait to hear back from the borrower before accepting the loan.
If you apply for a loan and a lender doesn’t require a hard credit inquiry, what type of credit score do they use to determine that you are creditworthy? A lender may use a borrower’s FICO credit score. Alternatively, a lender might use Equifax’s FICO score. The FICO score is a measure of the likelihood that the loan applicant will pay the loan back on time and in full.
How do I know if a lender uses a soft or hard credit inquiry?
A lender may or may not ask for a soft or hard credit inquiry at the start of the loan process. This depends on the lender and the details of your loan application. For example, a loan approval might be based solely on the FICO score, while a more extensive credit history might require a soft inquiry. For more information on loan requirements, you can talk to your lender to get the full details about your specific loan.
How much does a credit inquiry cost?
A credit inquiry is typically free of charge. However, if you want to make a specific change to your credit report after the inquiry has been completed, it will cost you. This may be because you have to pay the lender’s additional processing fee to amend the credit report. This fee will be different for each lender. Be sure to check the fine print on your loan application so that you know exactly how much it will cost you.
How to keep your credit report in good condition?
A good credit score can take years to build. So, it’s very important to keep a good credit score up by keeping your credit report in good shape.
You can do this by following some of these credit score tips:
Pay your bills on time
Pay all your bills on time. This is something you should be doing anyway, but if you have been missing payments and that is why your credit score is low, it is even more important to pay all your bills on time. Pay all of your bills on time, but also try to pay a little extra towards the interest you are accruing on your credit card balance.
If you want to make a more permanent change, you can make a higher payment to bring the balance to a zero balance. The longer you have a zero balance on your credit card, the higher your credit score will be.
Avoid fraudulent activities
When you apply for a new credit account, or for a loan or mortgage, you’ll want a lender to see that you are creditworthy. However, be careful to avoid putting yourself in situations where you could be approached by fraudsters. For example, if you are applying for a mortgage or new credit account and get a call from someone claiming to be from a “financial institution” asking for your credit card information, it’s best to hang up.
You should also be careful about clicking on links in emails. If the link sends you to a fraudulent website, your computer could be infected with malware that could steal sensitive information from your computer. Make sure to carefully check your credit card statements and bank statements. Don’t hesitate to report fraud to your bank or credit card company if you believe you are the victim of it.
Don’t apply for new credit
Apply for new credit only if you are preapproved for it. Sometimes, your lender may preapprove a line of credit, which you can then pay off as your income grows. Once you do have a new credit line open, you will have to meet all the monthly payments on the line of credit.
Contact the creditor
If you have a problem with a debt collection agency or a collection agency that is harassing you for a debt that you’re not responsible for, contact the debt collector directly and ask them to stop contacting you. Also, if you are writing a negative review about a creditor, you should contact them about that. You can find the contact information for the collection agency or debt collector you are contacting here.
Don’t ever try to get money by pretending you are a victim of a debt collection agency or a debt collector. Instead, you can submit a written complaint to the appropriate debt collector and ask them to cease and desist all their calls.
Most of us are familiar with soft credit inquiries such as your Experian credit score and banks using your credit score to determine credit offers to you. Those are essentially social credit factors, which have no impact on actual credit scores. This article was focused on what happens when you have a hard credit inquiry. What you can learn from your hard credit inquiry and how it affects your credit report may surprise you. We hope you get a clear understanding of both things.
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