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There are several factors that influence your credit score, one of which is how frequently you apply for new credit. To account for this, credit scoring companies use credit inquiries that are found in your credit reports to help calculate your credit score.
But not all credit inquiries are created equal, and many inquiries don't impact your credit score at all. Here's what you need to know.
What Is a Credit Inquiry?
Once you've established your credit report, it may be viewed by certain parties who have the legal right to do so. That can include lenders you've submitted a credit application with, existing creditors, prospective employers, landlords and more.
These various institutions may want to view your credit information to determine the risk that you won't honor your financial obligations. A poor or limited credit history could make it difficult to be approved for credit, get certain jobs or rent an apartment, for instance.
There are two types of inquiry: hard and soft. Hard inquiries typically result when you apply for credit and give the lender permission to view your credit reports and the credit scores based on information found in your credit reports.
Soft inquiries are a little different. Soft inquiries provide limited information that can give the person or institution a basic understanding of your credit history. Checking your own credit reports is another instance that results in a soft inquiry.
How Do Inquiries Affect My Credit Score?
Soft inquiries may appear on your credit reports, but they don't have an impact on your credit scores.
In contrast, hard inquiries can have a temporary negative impact on your credit score. According to FICO®, each hard inquiry lowers your FICO® Score☉ by less than five points in most cases. Hard inquiries remain on your credit reports for 24 months but only impact your FICO® Score for 12 months.
Multiple hard inquiries in a short period of time can compound this impact, however. That's why it's best to avoid applying for multiple credit accounts in quick succession.
The exception to this rule is if you submit multiple applications when shopping around for the best loan terms. This strategy is common with auto loans, mortgage loans and private student loans. Each inquiry will show up on your credit reports, but as long as you complete your rate-shopping process within a short period—14 days is recommended—they'll be combined into one for purposes of calculating your credit score. Remember, though, that multiple credit card applications aren't treated the same way.
How to Keep Inquiries From Hurting Your Credit
Credit inquiries and the appearance of new accounts only make up roughly 10% of your FICO® Score, so they're not as important as your payment history or how much you owe.
That said, you can avoid a significant negative impact from hard inquiries on your credit score by applying for credit only when you need it and avoiding multiple applications in a short period unless you're rate-shopping for a loan. In that case, make sure you complete the process within a two-week period.