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What is a hard inquiry, and how does it affect your credit score?

When it comes to applying for credit, you’ve probably heard the term “hard inquiry” thrown around. But what exactly is a hard inquiry, and why does it matter? Let’s take a closer look at this mysterious credit term.

What is a hard inquiry?

First off, a hard inquiry is a credit check that’s initiated when you apply for credit. This type of inquiry is called “hard” because it can have a negative impact on your credit score. In fact, a single hard inquiry can lower your score by several points.

So why do we have hard inquiries?

Before lending money a lender must assess a borrower’s risk. They do this by checking their credit history, and a hard inquiry allows them to see how much credit they have, how much debt they’re carrying, and whether they’re making payments on time.

This information helps lenders decide whether an applicant is a good candidate for a loan or credit card. 

But even though hard inquiries serve a useful purpose, it’s important to limit your number. These show up on your credit report, and having too many in a short period of time can signal that you’re desperate for credit and likely a high-risk borrower. 

Does “rate shopping” trigger a hard inquiry?

This is where the conversation of “rate shopping” comes in.

Rate shopping is when you apply for credit with multiple lenders to compare interest rates and terms. While this is a smart strategy for finding the best deal, it can also result in multiple hard inquiries.

So, how do you avoid multiple hard inquiries when rate shopping? One option is to complete all of your credit applications within a short period of time, such as two weeks. Credit scoring models are designed to recognize rate shopping behavior, in which case multiple similar inquiries within this window are counted as a single inquiry.

Another option is to use pre-qualification tools, which allow you to compare offers without initiating a hard inquiry.

Now, I know what you’re thinking: “Why do lenders make things so complicated?” Unfortunately, the world of credit is complex – hence the importance of education. 

Bottom Line: A hard inquiry is a credit check that can have a negative impact on your credit score. This is how lenders assess creditworthiness, however, too many hard inquiries can hurt your chances of getting financing. If you’re rate shopping, be mindful of when and how you complete applications, and use pre-qualification tools to minimize the impact to your score.