As a business advisor, I work with a variety of people. When they find out I am also a personal finance expert, I get a lot of questions about their personal financial situations. Surprisingly, top among their concerns is how inquiries might impact their credit scores.
Inquiries do factor into overall credit scores, but it's a small portion of a bigger picture — and it's often smaller than many people realize. The FICO® Score* powered by Experian is based on calculations of your overall credit history. It takes into account the amount of money you owe, your payment history, how long you've been using credit, the types of credit you use and recent credit activity. Inquiries fall into this last part.
What Is an Inquiry?
An inquiry occurs when someone reviews your credit profile. Inquiries fall into two categories — hard and soft — that depend on who's viewing your credit. A hard inquiry occurs when you authorize someone else, such as a potential lender, to review your profile. Potential creditors do this to weigh the risk of extending you credit or renting you an apartment. Hard inquiries remain on your Experian credit report for approximately two years but only impact your FICO® Score powered by Experian for 12 months.
Soft inquiries occur when someone checks your credit for reasons other you proactively applying for a loan or submitting a rental application, like when you check your own credit. Have you ever received a pre-approved credit card offer in the mail? If you did, the lender made a soft inquiry into your credit profile to find out if you meet its minimum requirements. The inquiry wasn't initiated by you so it doesn't count against your credit score.
Soft inquiries on your credit report are only visible to you, except: (1) insurance companies may be able to see other insurance company inquiries; and (2) inquiries by debt settlement companies you have authorized to access your report may be shared with your current creditors. Again, these inquiries have no effect on your credit score as they are never considered as a factor in credit scoring models. Soft inquiries are not disputable but are available for reference.
Not all inquiries are created equal. For example, the FICO® Score using Experian data considers whether you're shopping for the best rate on something like a mortgage, an auto loan or student loan. It's designed to ignore multiple inquiries made within a certain time frame — usually 30 days prior to scoring — by rolling them into one. You might have contacted five lenders for the same purpose but all this activity results in only one hard inquiry.
So when might inquiries affect your credit? The developers of the FICO® Score powered by Experian determined that inquiries impact individuals differently based on their credit standing. Those with only a few credit accounts or a short credit history are impacted more by inquiries than those with a stronger credit history. After a year, an inquiry of any type shouldn't count toward your FICO® Score powered by Experian any longer.
All in all, inquiries don't play a major role when it comes to your credit scores. If you experience a dip because of inquiries, it usually won't be much and I wouldn't lose any sleep over how long they'll remain on your report.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Experian.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on November 17, 2015, and has been updated.
*Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn more.