Every time you apply for a credit product, such as a car loan or a mortgage, the lender with whom you are dealing will make an inquiry on your credit standing with the credit bureau (either TransUnion or Equifax). This inquiry will show up on your credit report, but a number of factors influence the effect this inquiry will have on your overall credit score and credit health.
It is normal and expected that people will seek to obtain credit. But if there are too many inquiries on your credit report, within a short period of time, it could signal problems. This could indicate that you need access to more money than you can actually afford to pay back. If you have many inquiries for a range of different products such as loans, lines of credit, or credit cards, this will also have a negative impact on your credit score.
In certain cases, such as shopping for a mortgage or auto financing, having several inquiries made within a two week window can be beneficial. All inquiries related to car or mortgage financing made within a two week span are often combined and treated as a single inquiry, and will have a virtually negligible impact on your overall score.
“HARD HITS” AND “SOFT HITS”
Inquiries that are recorded on your credit report and count toward your credit score are sometimes referred to as “hard hits.” Anyone with access to your credit report will see these inquiries. An application for a loan or car financing would be considered a hard hit. In some cases, rental and employment applications will also appear on your credit report as hard hits.
“Soft hits,” on the other hand, do not show up on your credit report to everyone who views it. Only you can see “soft hits” when you request your own credit report, and these types of inquiries do not affect your credit score in any way. Requesting your own credit report from a credit reporting agency is an example of a soft hit. A business or lender you already have an account with might ask for your credit report to update their records to see whether you qualify for credit limit increases
or other products.
In general, one of the best ways to improve your credit score is to limit the number of times you apply for credit within a short period of time. However, if you are shopping for car loans or mortgages, be sure to follow up with the reporting agencies the following month to ensure they have listed your inquiries properly. The golden rule is to seek credit only when you really need it.
It is generally understood that each inquiry lowers your credit score by a couple of points, and it can take months for your score to come back to its previous standing. That may not sound like a lot, but sometimes it can make all the difference between rejection and acceptance for a new credit product.