An inquiry into credit report inquiries
Credit, not the dollar is the most exchanged form of currency within the United States. People live and swear by plastic money. It does not end there. The money market of America is entirely based on credit in multiple forms, from mortgages and HELOCs to Best Buy cards and installment loans. If you have ever applied for a credit card or a home loan, you would definitely know what a credit report is and how it works.
Assuming that, lets skip over all the grimy and gory details of how exactly a credit report works, what goes into calculating your credit score and its importance as far as personal credit availability is concerned. Rather, let’s focus on something far simpler and yet entirely confounding when it comes to understanding and assessing your credit report and your FICO score.
Most people who have ever checked their own credit report or went out shopping for a mortgage or a car loan knows what an inquiry is. TransUnion, one of the leading credit reporting agencies (CRAs) in the country, defines an inquiry as a record which is generated when someone takes a look at your credit report.
Types of inquiries
Urban legends have somehow managed to convince the masses that all kinds of credit inquiries are bad, whether it is the mortgage company agent pulling a copy of your report or be it you checking an online copy to see if everything is in order. Most people think that generating an inquiry is the shortest path to ruining your perfect 750 points FICO score.
Soft inquiries are generated when you sit down in front of your laptop at the end of every few months and pour over your credit report to see if something is being reported incorrectly or to find out if any collection agencies are coming after you. Soft inquiries are also generated when employers, insurance companies and banks extending pre-approved credit offers take a peek at your credit report.
Soft inquiries have no negative impact whatsoever on your score. Therefore, contrary to what most people would have you believe, checking your own credit report does not ding your score.
Hard inquiries on the other hand, are generated when a lender pulls your credit report to assess risk factors implied by your creditworthiness. They are mostly generated by lenders reviewing your credit report in connection with an application which you submitted requesting a new line of credit or an increment on one you currently hold. Collection agencies also generate a hard inquiry when they pull your report.
Unlike soft inquiries, hard inquiries do damage your credit score. One single hard pull can ding your score by as much as one to five points. This might sound a little discouraging, especially if you are in the market looking for the best rates or quotes. The good news is that FICO Model 8 encourages rate shopping by consolidating all hard pulls generated for a car loan or a mortgage within a period of 2 weeks into a single hard inquiry.
Why are credit report inquiries generated?
Credit report inquiries, both hard and soft, are generated and recorded for one simple reason. Although inquiries are not given the same importance as payment history or the credit utilization ratio, it forms an integral part of FICO’s risk assessment formula. FICO insiders say that a large number of hard inquiries is directly correlated to increased lending risks. People with six or more inquiries on their credit report within a period of 30 days are eight times more likely to file for bankruptcy as compared to a person with no inquiries on his report.
How long do inquiries stay on your credit report?
Unlike the credit information which appears on your credit report and has a shelf life of 7 to 7 years and 6 months, both hard and soft inquiries have a considerably shorter life span. Soft pulls are generally visible on your report for at least one year from the date it was generated.
Experian delists hard pulls after 2 years and one month from the date it was generated. TransUnion and Equifax choose to delete hard inquiries exactly 2 years from the date it was generated.