A credit inquiry occurs when a lender or financial institution checks your credit report as part of the approval process for a loan or credit card. There are two main types of credit inquiries: hard inquiries and soft inquiries.
Hard inquiries can potentially lower your credit score. When you apply for a new line of credit, such as a mortgage, auto loan, or credit card, the lender will perform a hard inquiry to view your credit history, which may lead to a temporary decrease in your credit score. The impact is usually minor, typically decreasing your score by a few points, and hard inquiries remain on your credit report for about two years, though their effect typically diminishes over time.
Soft inquiries do not impact your credit score. These inquiries occur when you or a company checks your credit report as part of a background check or pre-approval offers. Soft inquiries are not visible to lenders checking your report for new credit applications.
Managing the number of hard inquiries is essential, especially if you’re planning to apply for a major loan soon. It's wise to avoid multiple hard inquiries in a short period, as numerous inquiries can suggest that you are a higher credit risk to lenders.
To minimize the impact of inquiries, try to plan your credit applications wisely, and when shopping for rates, complete all inquiries within a short timeframe, as they may be treated as a single inquiry by some credit scoring models if related to the same type of loan, such as a mortgage.