Hard inquiry

What Is Hard Inquiry?

A hard inquiry, also known as a hard pull or hard credit check, occurs when a lender or creditor requests to review an individual's credit report as part of an application for new credit. This action is a crucial component of consumer finance and credit management, as it helps lenders assess the applicant's creditworthiness before extending a loan, credit card, or other forms of financing. Unlike a soft inquiry, a hard inquiry can temporarily impact an individual's credit score because it signals that the consumer is seeking new debt, which can indicate an increased financial risk to potential creditors.

History and Origin

The concept of evaluating a borrower's ability to repay debt dates back centuries, but formal credit reporting and the use of inquiries as we know them today began to take shape in the 19th century with the emergence of local credit bureaus. These early bureaus collected information on individuals and businesses to assist lenders in their credit decisions. However, the system was largely unregulated and often relied on subjective and unverifiable information.¹⁷

A significant turning point arrived with the passage of the Fair Credit Reporting Act (FCRA) in 1970.¹⁶ This landmark federal law was enacted to ensure the accuracy, fairness, and privacy of consumer information collected by credit reporting agencies.¹⁵ The FCRA established rules regarding who could access a consumer's credit report and for what purposes, thereby formalizing the distinction between authorized and unauthorized inquiries and laying the groundwork for how hard inquiries are handled today.¹⁴

Key Takeaways

• A hard inquiry is initiated by a lender when a consumer applies for new credit, such as a loan or credit card.
• It allows lenders to assess an applicant's creditworthiness and financial risk.
• Hard inquiries typically remain on a credit report for two years, though their impact on a credit score usually lasts for 12 months.
• A single hard inquiry typically causes a small, temporary drop in an individual's credit score, often less than five points.¹³
• Multiple hard inquiries in a short period, especially for different types of credit, can be viewed as higher risk by lenders.

Interpreting the Hard Inquiry

When a hard inquiry appears on a credit report, it indicates that a financial institution has formally checked a consumer's credit history in response to a credit application. Lenders interpret hard inquiries as a signal of a consumer's intent to take on additional debt. While a single hard inquiry typically has a minimal and temporary effect, multiple hard inquiries within a short timeframe, particularly for various types of credit (e.g., a car loan and several credit cards), can suggest a higher level of financial instability or a greater potential for financial distress.¹² This is because consistently seeking new credit can imply a reliance on borrowed funds, potentially increasing the lender's exposure to risk.¹¹

Hypothetical Example

Suppose Sarah decides to purchase a new car and applies for an auto loan at a dealership. The dealership, in turn, submits her application to several lenders to find competitive interest rates. Each of these lenders performs a hard inquiry on Sarah's credit report.

Under common credit scoring models like FICO, multiple inquiries for the same type of loan (such as an auto loan, mortgage, or student loan) within a concentrated period (typically 14 to 45 days, depending on the scoring model) are usually treated as a single inquiry.¹⁰ This "rate shopping" window helps consumers compare offers without unduly penalizing their credit score. So, even though Sarah's report shows multiple inquiries for car loans, her score is impacted as if only one hard inquiry occurred.

Practical Applications

Hard inquiries are a standard part of the process when consumers seek various forms of financing. They appear in numerous real-world scenarios across personal finance and lending:

• Applying for a new credit card: Every time an individual submits an application for a credit card, the issuer performs a hard inquiry to assess their credit risk.
• Securing a mortgage or auto loan: When applying for significant loans like a home or car, lenders will conduct a hard inquiry to review the applicant's credit history and determine eligibility and interest rates.
• Requesting a personal loan: Personal loans also typically trigger a hard inquiry, as lenders need to evaluate the borrower's capacity for repayment.
• Opening new lines of credit: This includes retail store credit cards, home equity lines of credit (HELOCs), or other revolving credit products.
• Some apartment rental applications: Landlords may perform a hard inquiry as part of their tenant screening process to gauge financial responsibility.

Understanding when a hard inquiry will occur is crucial for effective financial planning and managing one's credit profile.

Limitations and Criticisms

While hard inquiries are a necessary part of the lending process, they do have limitations and can present challenges for consumers. The primary criticism revolves around their potential, albeit usually small, negative impact on a credit score. Although a single hard inquiry typically reduces a FICO Score by less than five points,⁹ this impact can be more pronounced for individuals with a thin or short credit history or those who have very few accounts.⁸

Furthermore, multiple hard inquiries in a short period for different types of credit can signal increased financial risk to lenders, potentially leading to a larger cumulative score drop or even a denial of credit.⁷ This is because applying for numerous new accounts at once can suggest a consumer is experiencing financial difficulties or is attempting to overextend themselves, which is viewed as risky behavior by credit scoring models.⁶ While credit scores generally recover within a few months with responsible payment history, a flurry of hard inquiries can create a temporary hurdle for consumers seeking favorable terms.

Hard Inquiry vs. Soft Inquiry

The key distinction between a hard inquiry and a Soft Inquiry lies in their purpose and impact on a credit score.

A hard inquiry occurs when a consumer actively applies for new credit, giving a lender permission to access their full credit report to make a lending decision. These inquiries are noted on the credit report and can cause a minor, temporary dip in the credit score. They signal a potential increase in a consumer's total debt burden.

In contrast, a soft inquiry happens when a person or company checks a credit report without it being tied to a new credit application. Examples include checking your own credit score, pre-approved credit offers from lenders, or background checks by employers. Soft inquiries are not visible to other lenders and have no impact on a consumer's credit score. They are informational or promotional and do not suggest an intent to take on new financial obligations.

FAQs

How long does a hard inquiry stay on my credit report?

A hard inquiry typically remains on your credit report for two years from the date of the inquiry. However, its impact on your credit score usually diminishes after 12 months.⁵

How many points does a hard inquiry drop my credit score?

For most people, a single hard inquiry will cause a drop of fewer than five points on their FICO credit score.⁴ The exact impact can vary depending on the individual's overall credit profile and the number of existing accounts.

Can multiple hard inquiries for the same loan hurt my score significantly?

No, not significantly. Credit scoring models recognize "rate shopping" for specific types of loans like auto loans, mortgages, or student loans. Multiple inquiries for the same type of loan within a typical shopping period (e.g., 14 to 45 days) are often treated as a single inquiry to minimize the impact on your credit score.³

Do hard inquiries matter if I have excellent credit?

While hard inquiries still register, their impact on an excellent credit score is generally less pronounced compared to someone with a shorter or less established credit history. The drop is usually minimal and temporary.²

Can I remove a hard inquiry from my credit report?

A hard inquiry can only be removed if it was made without your authorization or is a result of an error. If an unauthorized inquiry appears due to identity theft or a clerical mistake, you have the right to dispute it with the credit reporting agency.¹ Legitimate inquiries from applications you authorized cannot be removed.