How Many Points Does A Credit Inquiry Lower Your Score?

Your credit score is a crucial factor in your financial life, influencing everything from loan approvals and interest rates to insurance premiums and even job applications. One element that can affect your credit score is a credit inquiry. But how much does a credit inquiry actually lower your score? The answer isn’t always straightforward, and understanding the nuances can help you make informed decisions about applying for credit.

Understanding Credit Inquiries

First, it’s essential to distinguish between the two main types of credit inquiries: hard inquiries and soft inquiries.

Hard Inquiries (Hard Pulls)

A hard inquiry occurs when a lender checks your credit report because you've applied for credit. This typically happens when you apply for:

• A credit card
• A mortgage
• An auto loan
• A personal loan

These inquiries are also sometimes called "hard pulls" and are visible to other lenders. Hard inquiries can slightly lower your credit score, particularly if you have several within a short period.

Soft Inquiries (Soft Pulls)

A soft inquiry occurs when someone checks your credit report for informational purposes. These types of inquiries don’t affect your credit score because they are not linked to a specific application for credit. Examples of soft inquiries include:

• Checking your own credit report
• Pre-approved credit card offers
• Background checks by employers (with your permission)
• Credit checks by insurance companies

Soft inquiries are not visible to lenders and have no impact on your credit score.

The Impact of Hard Inquiries on Your Credit Score

Now, let's delve into the core question: How many points does a hard inquiry lower your credit score?

Average Score Decrease

Generally, a single hard inquiry will lower your credit score by a small amount, typically less than five points. Some sources suggest the impact can be as low as 1-2 points. However, this is just an average. The actual impact can be more significant for individuals with limited credit history or those who have recently established credit.

Factors Influencing the Impact

Several factors determine how much a hard inquiry affects your credit score:

• Your Credit History: Individuals with a long and positive credit history are less likely to be significantly impacted by a single hard inquiry. Their established good credit outweighs the minor negative impact.
• Number of Recent Inquiries: Multiple hard inquiries within a short period can raise red flags for lenders. They might perceive you as a high-risk borrower who is desperately seeking credit. This can result in a more significant drop in your credit score.
• Credit Utilization Ratio: Your credit utilization ratio (the amount of credit you're using compared to your total available credit) also plays a role. If you have high credit utilization and multiple hard inquiries, the negative impact can be amplified.
• Age of Your Credit Accounts: A long credit history with older accounts will generally mitigate the impact of a hard inquiry compared to someone with only a few new accounts.
• Types of Credit Accounts: The types of credit accounts you hold (credit cards, loans, etc.) can also be a factor. A diverse mix of credit accounts is generally viewed favorably by credit scoring models.

When Multiple Inquiries are Counted as One

The credit scoring models recognize that consumers often shop around for the best interest rates on certain types of loans, like mortgages and auto loans. Therefore, multiple inquiries made within a specific timeframe (typically 14 to 45 days, depending on the scoring model) for the same type of loan are often treated as a single inquiry. This prevents your score from being penalized excessively for comparison shopping.

For example, if you apply for several auto loans within a two-week period, these inquiries will likely be grouped together and count as only one inquiry for scoring purposes.

How Long Do Hard Inquiries Affect Your Credit Score?

The impact of a hard inquiry on your credit score is temporary. Generally, a hard inquiry will only affect your credit score for about 12 months. After that, its impact diminishes. Hard inquiries remain on your credit report for two years, but after the first year, they typically no longer affect your score.

Minimizing the Impact of Credit Inquiries

While you can't entirely avoid hard inquiries if you need to apply for credit, you can take steps to minimize their impact on your credit score:

• Limit Applications: Only apply for credit when you genuinely need it. Avoid applying for multiple credit cards or loans at the same time unless you are comparison shopping for a specific type of loan (mortgage, auto loan).
• Shop Around Wisely: When shopping for a mortgage or auto loan, complete your applications within a short timeframe (ideally 14-30 days) to take advantage of the "grouping" of inquiries.
• Maintain a Healthy Credit Profile: Focus on improving and maintaining a strong credit profile. This includes paying your bills on time, keeping your credit utilization low, and building a long credit history.
• Monitor Your Credit Report: Regularly check your credit reports for errors and inaccuracies. You can obtain free credit reports from AnnualCreditReport.com. Disputing errors can improve your credit score.
• Avoid Unnecessary Credit Checks: Resist the temptation to apply for store credit cards simply to receive a discount. These applications can result in hard inquiries that may not be worth the short-term benefit.

Building and Maintaining Good Credit

The best way to minimize the impact of credit inquiries is to build and maintain a solid credit history. This involves several key strategies:

Pay Bills on Time

Payment history is the most significant factor in determining your credit score. Consistently paying your bills on time demonstrates responsible credit management.

Keep Credit Utilization Low

Aim to keep your credit utilization ratio below 30%. This means using less than 30% of your available credit on each credit card.

Diversify Credit Accounts

Having a mix of different types of credit accounts (credit cards, installment loans, etc.) can demonstrate responsible credit management and improve your credit score.

Monitor Your Credit Report Regularly

Regularly reviewing your credit reports allows you to identify and correct any errors or inaccuracies that could be negatively impacting your score. You can access free credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) through AnnualCreditReport.com.

The Credit Scoring Models

It's important to understand that different credit scoring models exist, and they may weigh credit inquiries and other factors differently. The two most commonly used credit scoring models are FICO and VantageScore.

FICO Score

The FICO score is the most widely used credit scoring model by lenders. It considers several factors, including payment history, amounts owed, length of credit history, credit mix, and new credit (which includes credit inquiries).

VantageScore

VantageScore is another credit scoring model that is gaining popularity. While it also considers similar factors to FICO, it may weigh them differently. It's helpful to monitor your credit score using both FICO and VantageScore models to get a comprehensive view of your creditworthiness.

Conclusion

While hard credit inquiries can slightly lower your credit score, their impact is generally minimal and temporary. By understanding the difference between hard and soft inquiries, limiting unnecessary credit applications, and focusing on building and maintaining a strong credit profile, you can minimize the impact of credit inquiries and achieve your financial goals.