Whether you’re looking to open your first credit card or want to open a new line of credit for any reason, you should always enter any new financial relationship with an educated strategy. This blog serves as a tool to help people understand some of the main things our members ask about or need to know about. One thing that people are often confused about is what a hard inquiry is versus a soft inquiry. Today, we will go over that, how it can affect credit, and some real-life examples of things that will be considered a hard inquiry.
What Is A Hard Inquiry?
When a lender or financial institution reviews your credit report to decide whether to lend you money or not, this is what is known as a hard inquiry. The action requires you, as the applicant, to authorize the lender to do so, as it can temporarily lower your credit score. You may also hear this referred to as a “hard pull.”
Why Does a Hard Inquiry Affect Your Credit Score?
When lenders check your credit after you apply for a new credit card or new loan, the hard inquiry acts as a flag to indicate you may be taking on new debt soon. Credit models view multiple inquiries in a short period as higher risk, posing a threat, and thus a minor drop.
Here’s a bit more detail on how a hard inquiry affects an applicant.
Risk Assessment
Taking on new credit or loans increases your financial obligations. A hard inquiry signals to other lenders that you are seeking to borrow more money.
Credit scoring models like FICO group multiple inquiries for mortgages, auto loans, student loans, and certain other loan types made within a specific time frame into a single inquiry, helping protect your credit score while you shop for the best rates.
Length of Impact
A hard inquiry will remain on your credit report for two years; however, they only affect your score for the first 12 months, and the initial dip typically fades within a few months.
What is the difference between a hard inquiry and a soft inquiry?
As opposed to when an institution runs a credit report on you, a soft inquiry happens when your credit is checked for a non-lending purpose. You may hear this called a “soft pull” also. Because they aren’t initiated by applying for new debt, they don’t affect your borrowing risk.
This could be something like:
Personal Credit Check
Using financial monitoring programs or reviewing your OWN credit does not flag credit scoring models.
Pre-Approved Offers
If a lender checks your profile to see if you are pre-approved to send you an offer for a credit card or insurance promotion, this doesn’t affect your score.
Employment Screenings
Background checks, which you typically must opt in to, dealing with employment background screening or credit checks run by a hiring company, do not affect your credit.
So Does Applying for a Credit Card Help or Hurt My Credit?
That answer will depend on each individual’s specific position, but really, it could both hurt and help your credit. This is because of a few reasons, and it depends on whether you’re looking at short-term effects or long-term.
Yes, when you apply, a hard inquiry does ding your score. It will affect your score for 6 to 12 months. Opening a new card also shortens the average age of your credit history, which can cause a small drop. Applying for multiple cards in a short time can also compound the impact and signal financial distress to lenders.
However, in the long term, a new credit card can boost your credit score if you use it responsibly. This means making 100% of your payments on time to build a strong, positive payment history. It means if you keep spending steadily and avoid running up a balance, it improves your credit utilization ratio. Lastly, lenders like to see a diverse mix of credit types.
If you’re looking to open a new credit card, we highly recommend exploring the options available at TVFCU. As a credit union, we offer unique benefits that many banks don’t, including competitive rates and personalized service. We’d love to meet you! Stop by our branch Monday through Friday at 10 Jefferson Ave. in Batavia, NY, visit our website to learn more and apply online, or give us a call at (800) 722-8224. We’re here to help you get started today!
