Imagine that you just hit submit on that loan application; fingers crossed for approval. Then you realize, “Did checking my credit for this application hurt my score?”
Credit inquiries are often very confusing, and you just don’t know when it’s going to hit your report and potentially harm your credit score.
A credit inquiry happens whenever a lender pulls your credit report to assess your eligibility for a loan, credit card, or even certain services like renting an apartment.
Soft Inquiries vs. Hard Inquiries
Credit inquiries are essentially checks on your credit history, but their impact depends on the type.
Hard inquiries
These are triggered when you apply for a loan, credit card requests, or some utility connections. These inquiries can slightly decrease your credit score for up to two years because they indicate you’re actively seeking credit. However, these are temporary marks on your score.
Soft inquiries
Unlike hard inquiries, they don’t have a negative impact on your credit score. Checking your credit report, receiving pre-approved credit offers, or undergoing employment background checks involving credit checks are all examples of soft inquiries. Soft inquiries provide valuable insights without affecting your credit score.
Frequency and timing
It’s important to be mindful of the frequency and timing of credit checks, as they can impact your credit score. If there are a lot of credit checks within a short period, your score might drop, potentially indicating to lenders that you urgently need credit.
Please keep in mind that the impact of these checks will decrease over time. If you plan to apply for a loan soon, it is crucial to be cautious about when and how frequently your credit is checked, as this can help maintain your score in good condition.
Remember that lenders will pay attention to how many times they have checked your credit and may question the reason behind it. For example, if you are comparing rates for a loan, it is different from someone who seems to be struggling financially.
Understanding Credit Scoring Models in Canada
In Canada, major credit bureaus like Equifax and TransUnion consider various factors when assessing an individual’s creditworthiness, including inquiries on their credit report. These inquiries, which occur when lenders or creditors access an individual’s credit report for purposes such as loan or credit card applications, are weighed differently based on several factors.
Different Models
While Equifax and TransUnion utilize similar principles in their credit scoring models, the exact weightings and algorithms may vary between them.
Here’s a simpler breakdown:
- Type of Inquiry: When lenders check your credit when you apply for a loan, it’s called a hard inquiry. If it’s a “hard inquiry,” it can lower your score more than a “soft inquiry” (for things like background checks or checking your own credit score).
- Timing: If you’re shopping for a loan, multiple inquiries in a short time for the same type of loan might count as just one inquiry. This helps you avoid a big hit on your score.
- Frequency: Too many inquiries in a short time can make you seem risky. Credit bureaus pay attention to how often you’re getting checked out.
- Mix of Credit: If you have different types of credit inquiries such as mortgage or credit card, it can be better for your score than having lots of inquiries for the same type of credit.
- Age of Inquiries: New inquiries hurt your score more than older ones. As time passes, their impact lessens.
Severity of Impact
If you have a good credit score and are currently shopping for loans, you have managed your finances well. In such a situation, if a lender checks your credit report, it won’t affect your score significantly because it’s already high. It’s similar to getting extra looks at an excellent report card, which will only slightly change your overall grades.
However, if your credit score could be better, like if you have missed payments or have a lot of debt, every time a lender checks your credit report, it can significantly impact your score and bring it down more quickly.
The impact of credit inquiries depends on the quality of your financial habits. Inquiries will not harm your score if you have been responsible for your finances. However, if your financial habits are unstable, they can significantly impact your credit score.
Temporary effect
Hard inquiries on an individual’s credit report can temporarily negatively impact their credit score, which usually lasts between 12 to 24 months. However, the negative effect on the credit score gradually diminishes over time. During this period, it is important to manage your finances responsibly, as it allows your credit score to rebound, which reflects positively on your creditworthiness.
Managing the Impact of Credit Inquiries
Applying for credit is crucial, but each application leaves a “hard inquiry” on your report, potentially lowering your score. Here’s how to navigate inquiries strategically:
Be Selective – Apply for credit only when necessary. Skip unnecessary pre-approvals; they often trigger inquiries despite not guaranteeing approval. Utilize soft inquiries, offered by some lenders, to gauge your eligibility without harming your score.
Time is Your Friend – When major loans like mortgages are on the horizon, spread out inquiries. Bunching them up raises red flags for lenders concerned about your financial stability. Space out applications to minimize the combined impact.
Build a Strong Foundation – Inquiries are temporary blips. Focus on the big picture: consistent, on-time payments are the cornerstone of a healthy score. Keep your credit card balances low, and consider diversifying your credit mix with different credit types. By prioritizing these core aspects, you build a strong credit foundation that easily weathers the temporary impact of inquiries.
Addressing Myths and Misconceptions
Checking your own credit
A widespread misconception is that checking your credit score can harm your credit. However, this is not true. Whenever you check your credit score, it generates a soft inquiry, which doesn’t impact your credit score. It’s a healthy habit to periodically monitor your credit report for accuracy and update yourself about your financial well-being.
Shopping around for loans
It’s crucial to note that when comparing loan rates, like for a mortgage or auto loan, doing so within a brief timeframe typically doesn’t harm your credit score. This is because multiple inquiries from rate shopping are often treated as a single inquiry, given they occur within a specific window. However, if you make multiple applications for the same type of loan quickly, each application might lead to separate hard inquiries, potentially lowering your credit score. Therefore, it’s advisable to utilize pre-qualification checks, which are soft inquiries, to evaluate loan offers without impacting your credit score.
Building credit with inquiries
Some people mistakenly believe that applying for multiple credit cards at once can quickly build credit. While it’s true that opening new credit accounts can increase your available credit and potentially improve your credit utilization ratio, the process involves hard inquiries, which can initially lower your credit score. Moreover, simply having multiple credit cards doesn’t guarantee better credit. What’s more important is how you manage those credit accounts after approval. Making on-time payments, keeping balances low, and responsibly using credit over time are the key factors contributing to long-term credit score improvement. So, while inquiries may have a temporary impact, the responsible management of credit accounts ultimately leads to lasting credit score enhancement.
Additional Tips and Resources
Monitor your credit reports
Checking your credit reports on a regular basis is a crucial step to ensure accuracy and detect any fraudulent activity, including unauthorized inquiries. Free copies of your credit reports are available from Equifax and TransUnion, so it’s easy to stay on top of your credit and protect your financial well-being.
Use credit monitoring tools
It is important to maintain good financial health by keeping track of your credit score. Using free credit monitoring tools is a practical approach to staying updated on any changes in your credit score. These tools assist in keeping track of your credit score and alerting you of any new inquiries that may be present in your report. You can promptly address discrepancies and take necessary actions to safeguard your credit score by frequently monitoring your credit.
Seek professional advice
If you’re unsure about how to manage inquiries or improve your credit score, consider seeking guidance from a credit counsellor. Credit counsellors can provide personalized advice tailored to your financial situation and help you develop a plan for addressing inquiries and optimizing your credit score. Many nonprofit organizations offer low-cost or free credit counseling services to assist individuals with their credit-related concerns.
Conclusion
It’s essential to concentrate on building strong credit overall by maintaining healthy financial habits, such as timely payments and low credit utilization.
Knowing how credit inquiries work and taking proactive steps to manage them by focusing on responsible credit use and maintaining a positive credit profile, individuals can minimize the impact of inquiries on their scores.
Have lingering questions about credit inquiries and their impact on your score? Kenny Johnson University offers comprehensive credit education resources and personalized consultations.
