Fact: Inquiries May Temporarily Lower Your Credit Score, but Not Enough for Concern
You have may have heard that when anyone – including you– checks your credit, your credit score goes down. For the most part, this is true, but the effect is temporary and nothing to be concerned about. For a better understanding of when and why this happens, it’s important to distinguish between a “soft” and “hard” inquiry.
A “soft” inquiry is usually for information purposes. Examples include employer background checks, getting “pre-approved” for credit card offers, and checking your own credit score. Other examples can include getting a mortgage pre-approval, applying for an apartment, renting a car, setting up a cable account, or opening a bank account.
Soft inquiries may occur with or without your permission. Each inquiry typically lowers your credit score by about three points. Multiple soft inquiries within a short timeframe from businesses in the same industry usually count as one inquiry, so you’re not penalized for shopping around. The effect, if any, usually lasts no more than 90 days.
A “hard” inquiry occurs when you open a new trade-line, like a car loan or credit card. The “hard hit” to your credit score can be anywhere from a few points to a 100 or more depending on your current credit profile and how your new activity compares to your previous history. If you’re opening a fourth credit card, the hit could be less than if you’re buying your first home. So a hard hit affects each person differently and can last for a few months to a couple years.
Example: Let’s say you’re shopping for a new car and each of five dealers check your credit. This should result in a single temporary reduction of three points from your score. The hard hit occurs when you buy your dream car and establish a new trade line by taking out a car loan.
Protection Against Excessive Debt
While it may seem you’re being penalized for using your credit, the whole point of lowering your score is to help protect you from opening too many credit accounts and taking on too much debt. Essentially you need to demonstrate that you can responsibly manage your new obligation before your score bounces back.
If you’re a good money manager and generally maintain a good credit rating, you shouldn’t be concerned about the soft or hard effect on your credit score. Both effects are temporary, and while they may help curb your urge to splurge in the short-run, they will not limit your ability to responsibly borrow in the future.
By Dave Kramer
Co-Author of The $500 Cup of Coffee