Credit Inquiries

One of the factors that determines a credit score is known as a credit inquiry. This is tracked on the credit bureaus as the number of times that you have requested a new line of credit in the past two years. Overall, this has a very low impact on your credit score. This is why RewardBus feels comfortable recommending our users apply to great products. The downside to being rejected is only a few points but the upside can be a few hundred dollars. If you are sweating a couple small points to your credit score, we can only recommend chilling out.

What is a hard inquiry?

Inquiries are often referred to as being either hard or soft. The distinction is best described in who is initiating the credit investigation. If you are requesting somebody check your bureau for a new line of credit (IMPORTANT: when you check your credit bureau at annually, this is NOT a hard inquiry), a hard inquiry is placed on your bureau. This usually occurs when applying for a new credit card, auto loan, mortgage (prequalifications count!), personal loan or when applying to increase your credit line for a credit card. The reason these are tracked is that lending institutions want to see how "hungry" (or, if extreme, even desperate) a borrower is. High numbers, while not always true, generally indicate a borrower who is seeking a lot of credit and thus is more likely to charge off. Some banks even have hard limits on the number of inquiries you are allowed to have before they extend a loan (for example, they won't lend if you have requested credit >15 times in the past 2 years). These rules will be behind the scenes and not disclosed to the consumer.

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What is a soft inquiry?

Soft inquiries are (usually) much, much more common than hard inquiries. Luckily for us as consumers, they do not have any negative impact on credit score or creditworthiness. Soft inquiries are usually used for marketing or account management reasons. When a company pulls your credit bureau for marketing purpose, they are often looking to target a person based on their creditworthiness. If it is a prime card, for example, they may only want to send mail to consumers with a FICO>750 or other credit characteristics. Or, sometimes, they are looking to target a subprime customer. If you have received "pre-approval materials" from lending institutions, it is often a sign they think you are a subprime customer because:

  • Prime customers rarely respond to marketing materials and even if they do:
  • They particularly don't respond to the fact that they will be approved

Banks are able to pre-approve customers without looking at the detailed up-to-date credit bureau (or other factors such as down payment and income for larger loans) simply because they will offer sky-high rates and large fees. Try to avoid pre-approval offers at any cost and work on your credit score so you don't need a letter to convince you of your approval likelihood.

Pre-approval offers may at first seem enticing: the terms are usually disappointing

Account management purposes are usually for internal policies at lending institutions. Because many open-ended loans can run up balances and losses during a recession, banks try to predict a user's likelihood to chargeoff as they mature as a customer. This usually comes through as credit line increases or decreases but can even impact other treatments such as their likelihood to e-mail you or the methods they use to try to collect money. For example, a bank may like a customer when they apply and offer a $10,000 credit limit. As the economy itself worsens and the customer decreases from a 730 FICO to a 705, the bank may reassess their evaluation and drop the limit down to $500, essentially shutting out the user. This is why many personal finance experts recommend holding cash as well as credit for an emergency as credit is generally a fluctuating asset.

The other reasons for soft inquiries are the miscellaneous times that your credit is checked, such as when you are applying for a new job. The other area that is a grey area is landlords: some landlords use soft inquiries while others, unfortunately, do hard inquiries (WHY!?). The only way to know for sure is to check. I have had a landlord claim they do hard inquiries before and, after refusing to give them permission, they waived that requirement.

In short, credit inquiries are a very, very small factor to worry about. Overall debt load, number/age of accounts and on-time payments are the most important part of a healthy credit life.