What is a Hard Inquiry? Why Issuers Check Your Credit and What it Means for Your Credit Scores

One of the more frustrating aspects of personal finance is that your credit score can decline after applying for a loan or credit card. How does that make sense? It’s not right! And I agree. In some ways, it’s not fair, and it definitely seems irrational. 

However, it’s not as bad as it sounds. When you submit an application for credit, a hard inquiry will appear on your credit file and will be factored into your credit score. The same thing can happen when you request a credit line increase. 

When you apply for a new credit product or request a credit limit increase on a current account, the lender will notify the credit bureaus, and a hard inquiry will be added to your file. Such inquiries can negatively impact your credit scores. 

This is called a hard inquiry, and I’m going to tell you all about why they exist and their real impact on your credit score. After getting all the facts, chances are you’ll be greatly relieved — and can pursue the credit product you want without unnecessary stress.  

So how does information about you applying for a new credit account or requesting a higher credit line wind up on your credit reports? The lender notifies the three major credit bureaus: TransUnion, Equifax, and Experian. 

It may not happen immediately, though. Lenders typically furnish the credit bureaus with data on a monthly basis. Therefore, it can take days or weeks before the hard inquiry shows up on your report. Once it does, the inquiry will be listed on your report for two years.

Applying for Credit Cards and Loans

When you apply for a credit product, such as a credit card or loan, you provide the lender with permission to check your credit history. With that information, they can make an objective decision.

If you are accepted, the financial institution can set the right terms and determine how much they are willing to lend.

The reason credit inquiries show up on a credit report is because they are relevant to other lenders. They want to know if you have been in the market for credit cards and loans — and how many applications you’ve submitted. 

If you have applied for many accounts within a short span of time, it can be perceived as a sign that you may be in financial trouble and are desperate to borrow money. You may appear to be a credit risk, so your credit scores can decrease. 

Seeking Credit Limit Increases

Another trigger for a hard credit inquiry to appear on your credit file is if you have asked your current credit card issuer for a higher credit limit.

Maybe you have a credit card with a $1,000 credit line but will soon be traveling and need a higher limit so you can safely pay for everything while you are on your trip. 

Even if you have been a responsible cardholder, the creditor may want to see how you have been managing your accounts with other lenders. In that case, they will check your credit, resulting in a hard credit inquiry.

If they see that you have been treating all of your accounts responsibly, they may agree to increase the line. 

Conversely, if you have a substantial amount of debt, have recently missed payments, or some accounts are in collections, they may decide that you are ineligible for a credit line increase. 

If you’re trying to preserve every last credit scoring point, you may panic before pursuing a new credit product or credit line increase. Don’t. Maintain perspective. Hard credit inquiries are minor credit scoring factors compared to those that have a great influence on your scores. 

For example, FICO scores rank payment history as 35% of your score, credit utilization as 30%, and length of credit history as 15%. In a tie for 10% are credit mix and hard credit inquiries. 

That means if you have been using a variety of credit products a certain way — making all of your payments on time and keeping revolving debt very low compared to the amount you can borrow — for many years, your credit scores should be on the high side. If so, applying for one or two credit products within a few months shouldn’t have much impact on your scores. 

The more positive information you have on your credit report, especially over many years, the less a hard credit inquiry will affect your credit scores. 

On the other hand, if you apply for many new accounts in a couple of weeks, that action can throw up a red flag, thus resulting in a more substantial credit score decline. 

Where you will really see a negative impact is if you already have low credit scores or don’t have much on your credit report in the first place. In that case, applying for credit or asking for a higher credit limit can lead to a more dramatic drop in score.

Initial Credit Score Drop

Consumer credit scores range from 300 to 850, with higher numbers being preferable because they indicate less credit risk. Good FICO scores start at 670.

Per myFICO, a single credit inquiry will usually take less than five points off your scores. Although that’s not much of a drop, it will be significant if you are on the edge of a lower score.

When you’re in the process of building your credit, focus on the factors that carry the greatest weight. Pay all of your accounts that are listed on your report on time, and keep your credit utilization ratio low. 

And if you do get another credit card or loan, it can reduce the length of your credit history, which can lower your credit scores further. For example, if you have had the same credit cards for five years, introducing a new card could have a negative impact on your scores because it lowers the average length of credit history. 

However, the point loss from the inquiry and new credit will be temporary. As you use your accounts responsibly, your scores should rebound quickly. 

How Long Hard Inquiries Stay on Your Credit Report

Although a hard credit inquiry will remain listed on your credit report for two years, FICO only uses the inquiry in its scoring algorithm for one year. 

VantageScore is another credit scoring company, and its model can input a hard inquiry into its algorithm for the full 24 months. So, if you decide to apply, it is best to assume the hard inquiry will remain for a couple of years.

The Impact of Multiple Inquiries in a Short Period

Because multiple hard credit inquiries, including requests for a higher credit line, can signal to other lenders that you may be a high credit risk, your score will decline if you make many within a short span of time. 

Multiple inquiries within a short period may be a red flag that tells creditors you are a risky borrower.

There are some exceptions to this rule, however. For example, VantageScore recognizes the importance of shopping around for the best loan, so those types of inquiries are counted as one if you make them within a 14-day period. 

FICO scores give you 45 days to shop for rates (though some of the company’s older models only give you two weeks).

Now you know what hard credit inquiries are, but there is another type to understand: soft inquiries. As with hard inquiries, soft credit inquiries appear on your credit report for two years. However, they will only be visible to you, and they are never factored into your credit scores. 

Soft inquiries for credit are not generated by you when you apply for an account or request a longer credit line. Instead, they happen when:

• A business requests a check of your credit history. The credit bureaus will provide them with access to your file. This way, they can identify which consumers fit the profile of the customer base they are seeking. For example, a credit card company may want to promote a new card account to people who have not missed any of their credit card or loan payments in the last two years and who have kept their credit utilization ratio below 30%. If you are a match, you may receive an offer in the mail! There’s no guarantee you’ll qualify, but it’s a good indication that you may. 

• You check your own report. A soft inquiry will also appear when you check your own credit report. Pulling your report and reviewing everything that is on it is a responsible thing to do. It is not factored into your credit scores, so will never be held against you. 

• An employer checks your credit. Soft credit checks can also occur if you have given permission to an employer to access your credit report. Some companies will ask for permission to pull your report, especially if you are applying for a position that requires financial responsibilities. If you have a history of missing payments or your report shows other troubling information, an employer may ask you about it. Not all states allow companies to review your reports, though. Currently, 11 states limit employment credit checks: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington. 

Afraid to check your own credit reports because you think it may trigger a hard inquiry? Don’t be. It won’t. Reviewing your credit history is important, and you will never be penalized for doing so. 

Missing payments or racking up too much credit card debt can significantly impact your credit scores. Hard inquiries don’t do much damage, but they are certainly something to keep an eye on.

There are several ways to minimize the negative effects of hard inquiries:

• Become an active credit product shopper. Don’t just apply for the loan or credit card that seems OK on the surface. Read over the terms, benefits, and credit requirements before submitting your application. It should be a great match for you and the lender. 
• Apply for one account, not several. Unless you are in the market for a mortgage, where you won’t get dinged for multiple applications, narrow your selection to the one that makes the most sense for you. 
• Get pre-qualified. Many lenders offer an online tool that allows you to submit your basic financial and credit information. This does not trigger a hard inquiry. Once done, you will be notified if there are any loans or credit cards that match your general profile. It can help you refine your search so that you don’t apply for products that are not within your scope. 

In the event you are rejected for a credit product, review your credit report to see what the problem is. If you can increase your score by taking certain actions, such as paying down high credit card debt, do it. This way, the next time you apply, you are more likely to be accepted, and you won’t have unnecessary hard applications on your report. 

Use Credit Monitoring Tools

If you’re like me, a lot is going on in your life. Keeping track of your credit history and credit scores can fall to the bottom of your to-do list and take time away from other important tasks. Technology to the rescue! 

If you are in the market for a new credit product, it will be important to know what your credit score is before applying. A credit monitoring service can help you stay on top of your history and scores so you don’t pursue a loan or credit card that you don’t qualify for, which will result in an unnecessary hard inquiry. 

Credit monitoring services will run regular credit report checks and notify you if there are any changes. Although there are fee-based options, Experian offers the service for free. In addition to getting alerts about inquiries, accounts, and adjustments to your personal information, the company will also let you know when your FICO score rises or falls.

MyFICO also has a free credit score monitoring service, which focuses on your Equifax report. 

After enrolling, you will begin to receive notifications about your credit automatically. 

Limit Requests for Credit Increases

Considering a credit line increase? There are some very good reasons for asking your credit card company to raise your credit limit. 

For example:

• You want to purchase something very expensive. If the credit line on your current account isn’t sufficient, you won’t be able to get what you need. 
• You’re going on vacation. It’s always a good idea to have enough borrowing power to help you out when you’re far from home. 
• You want emergency funding. You never know what the future holds. Having immediate access to a credit card issuer’s deep pool of funds can help you out of a jam. You may never need it, but it’s good to have, just in case.
• Your credit utilization ratio is too high. Your credit score may be low because your credit card balance is high compared to your current credit limit. By increasing the amount you can borrow, you will expand your credit utilization ratio, which can result in an improved score. 

Before you make a formal request, contact your credit card issuer and ask if they report credit limit increase requests to the credit bureaus. Not all do, so you may focus on the issuer that relies only on its internal data for approvals. 

Outside of such sensible reasons for a credit limit increase, avoid asking for it when you don’t really need one. If your credit card has a limit of $5,000 and you regularly charge only $100 or so, you should be fine with what you have. 

There is only one way to get a credit card or a loan from a financial institution. You’ll need to apply. Therefore, you also need to accept that it will result in a hard inquiry listed on your credit reports. 

But rather than hard inquiries being the end of the world, they’re a means to an end. Apply prudently, and you will have the credit product you want and the limit that best serves your needs.