Can too many inquiries into your credit report lower your credit score, and in turn affect your ability to get a loan? The short answer is: possibly. If you’ve applied for several credit cards within a short period of time, for instance, this attempt to obtain multiple sources of new credit can signal higher risk to lenders. These multiple inquiries will appear on your credit report. Most credit scores, however, are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. These are typically treated as a single inquiry and will have little impact on your credit score.
What is a credit report inquiry?
When you apply for any type of credit, you authorize the lenders to obtain a copy of your credit report from a credit bureau. There is a section of your credit report that tracks these inquires and lists who pulled your credit, when, and for what purpose. Any time a lender requests your credit report federal law requires that each of the three credit reporting agencies (Experian, TransUnion, and Equifax) keep a record of that activity for up to 24 months. Every time you apply for a loan, pre-qualify for a mortgage, fill out a credit card application or ask for a copy of your own report, an inquiry is posted to your record.
What is a hard inquiry?
Hard inquiries occur when a financial institution checks your credit report when making a lending decision. This commonly takes place when you apply for a mortgage, auto loan, credit card or student loan, and you’ve authorized the inquiry. It becomes part of your credit report and other lenders who pull your credit will see the inquiry. There are times when you may be shopping for the best rate, such as a mortgage or auto loan. All inquiries that occur within a 45-day period are generally considered one inquiry.
What is a soft inquiry?
Soft inquiries occur when a person or company, such as a potential employer, checks your credit report as part of a background check or when you check your own credit score. A soft inquiry may also occur without your permission. A common example is the pre-approved credit card offers you receive in the mail. Soft inquiries may be recorded in your credit report, depending on the credit bureau, but they will not affect your credit score.
Hard inquiries CAN hurt your credit score
Hard inquiries are necessary for certain financial actions, such as applying for a loan or credit card, but they should be minimized. A hard inquiry might lower your credit score by several points and will remain on your credit report for up to two years. As time passes, the impact to your credit score decreases and will disappear. If you have outstanding credit, a few points probably won’t hurt you but if you have borderline credit quality, you should think twice.
Your credit score is penalized for multiple hard inquiries because applying for too much credit at once may indicate that you’re desperate for credit, or that you aren't able to qualify for credit. While one hard inquiry will usually just lower your credit score by a few points, multiple hard inquiries in a short amount of time may cause significant damage to your score. Because of this, it’s important to apply for credit only when you need it.
But you CAN shop around for a loan
Shopping around for the best interest rate is very common in the mortgage-lending environment. But will this cause you to end up with multiple inquiries from multiple lenders? A smart credit-scoring model will be programmed to read multiple inquiries in a short period of time as a consumer shopping around for a good deal on a loan and not a consumer applying for four or five separate loans. This allows you to shop around for the best interest rate without having to worry about a major impact to your credit score.
How to dispute unauthorized hard credit inquiries
Your credit report will provide full details of all hard inquiries. If a review of your report reveals a hard inquiry that occurred without your permission, you may wish to dispute it. The Fair Credit Reporting Act only allows authorized inquiries to appear on your credit report, and you can dispute hard inquiries that have occurred without your permission.
To challenge creditors you believe did not have proper authorization to pull your credit file, prepare letters to each inquiring creditor asking them to remove their inquiry. You can also report errors on your credit report to each reporting agency. All 3 of the credit bureaus now accept filing of disputes online.
Before applying for credit, like a home loan or mortgage, take time to build your credit score. With a higher credit score, you'll improve your chance for approval at the best terms and rates. Keep your hard inquiries to one or two a year. On average, consumers with lower numbers of hard credit inquiries have higher credit scores. To keep track of hard inquiries, check your score and credit report. Federal law allows you to get a free copy of your credit report once every 12 months. If you’re a first time homebuyer, shopping for your next home, or refinancing, speak with a Lakeland Bank mortgage representative to learn more about credit scores and the loan process.