Hard Inquiry
By
Kenneth Long on April 8, 2010
A
hard inquiry is any credit check that results in a penalty. It represents an attempt to obtain debt by applying for a credit account. It is distinguished in this way from
soft inquiries, which include all other credit checks absent of an attempt to open new credit.
Hard inquiries are recorded so that lenders can track your attempts to open new credit accounts. This is an important function of FICO credit scoring models, since multiple hard inquiries can lower credit scores.
How Much do Inquiries Lower Credit Scores?
The actual impact of a hard inquiry on your credit score is often debated. Fair Isaac Corp. (developer of FICO scoring models) provides some insight into this effect through its spokesperson, Craig Watts. According to Watts, hard inquiries can lower your credit score up to 5 points.
The effect that an inquiry has on one consumer may be much different than that of another, since the makeup of your credit report has a major impact on how much a single inquiry can reduce your score. The number of accounts that you have as well as the general nature of your credit can influence the effect of a single inquiry.
One inquiry by itself may have a lesser effect on your scores than multiple inquiries in a short period of time. Most lenders view frequent inquiries as a sign of financial distress. Credit scoring models also account for this through greater penalties for frequent inquiries. In other words, a single inquiry may lower your score 1 or 2 points, while 5 inquiries could lower it up to 25 points. Since FICO scoring formulas are secret, we may only speculate on this impact based on information releases by Fair Isaac Corp.
Exceptions
Fair Isaac Corp. incorporated a couple of exceptions to how hard inquiries are recorded. These include all inquiries for either a vehicle loan or for a mortgage loan.
Applicants previously had a 10 day window, but now the exception spans 45 days. You may shop around for an automobile loan, applying with several different lenders without additional penalty. All of these related inquiries are grouped together on your credit report, and they are collectively counted as one single inquiry. Similarly, all mortgage loan inquiries within a 45 day window count collectively as one inquiry. This removes the penalty of shopping around for the best rate, which is a trait of smart consumer behavior. After all, are you really trying to buy 6 homes or are you just comparing offers?