How Inquiries Can Affect Consumers’ Credit Scores

Many things may weigh on consumers' minds when it comes to their credit standings largely because of the wide variety of factors involved in determining what separates a good credit score from a bad one. And while some factors are considered to be more important than others in the calculation of these ratings, one that often may be overlooked by consumers involves the ways in which they apply for credit.

A credit inquiry can take a number forms, both good and bad as far as scoring bureaus are concerned, and in many cases, it's very important for borrowers to know the difference. Some won't affect a person's credit standing at all, while others can do fairly significant damage if they're not handled in the right way. So what goes into determining these issues, and how do companies differentiate between a "soft" inquiry, which tends to be viewed positively, and a "hard" one, which can be more of a mixed bag?

What constitutes a soft inquiry?
Soft inquiries are, to put it simply, those that are almost always not made by consumers themselves, and have no effect on their credit standings as a consequence. For instance, many companies may run credit checks on consumers for reasons that have nothing to do with credit itself; insurance companies may use the data contained on a borrower's credit report to determine the rates they pay, service providers like cable or utilities companies can use them to determine whether they will or will not be able to sign up, and landlords may use them to see if a person can live in an apartment or home they want to rent. In fact, many businesses today run credit checks on prospective employees as a means of determining whether they should be hired. None of these actions, however, will affect borrowers' credit standings.

This is also true of when credit companies with which consumers already have accounts run credit checks on them, and even when those issuing preapproved credit cards send them mailers; while their credit is being considered in these instances, the consumers in question usually didn't ask for the credit check to be run, and therefore their score cannot be affected.

Consumers can also check their own credit, such as by ordering a credit report or score, without fear that this will impact them negatively. Credit issuers understand that this is part of healthy borrowing and financial habits, and therefore will not penalize consumers for doing so.

What inquiries are considered hard?
On the other hand, all types of credit checks that do not fall into the above categories are considered to be hard inquiries, and if they're not handled right, they can do damage to as much as 10 percent of one's credit standing.

For instance, when consumers actively apply for any type of credit with a lender, they will be considered to have started a hard inquiry. This includes all types of credit, from auto financing and mortgages to credit cards and more general loans. Each time a person applies for such an account, that is considered to be one hard inquiry, and the more you have in a short period of time generally leads to a lower credit score. There is, however, an exception to this: when consumers make a number of inquiries about one type of credit with a number of different lenders in a short period of time, this won't have as large an impact on one's score because it is considered to be rate shopping. That is, when a borrower is looking for a mortgage, for instance, they may visit a number of lenders and have credit checks run, and as long as these take place within a period of about a month and a half, there will be minimal negative impact.

However, repeated attempts to obtain different lines of credit during this time — say, a mortgage, a credit card, or an auto loan — will result in a potentially significantly diminished credit rating largely because lenders will see their attempts to get a number of different accounts as a potential sign of their lack of cash flow, which would necessarily make them a larger risk when it comes to lending. For this reason, consumers need to be smart about when and how they apply for any type of credit, lest they see their scores drop and put themselves at greater risk of rejection or worse borrowing terms.

Of course, before considering any type of new credit, consumers should take the time to order copies of their credit reports and check them over closely for any unfair markings. Upon discovery of these issues, it can be wise to work with a credit repair law firm, which may be able to help sort out the issues more expediently.