Credit inquiries come in two flavors: soft and hard. Here’s how each kind affects you.
Inquiries, soft or hard, are authorized requests to see your credit report. But the similarities end there.
Soft Inquiries
A soft credit inquiry is sort of a more routine credit check that can be done without your permission. Examples include when:
A lender you currently do business with requests your report to make sure you’re still creditworthy
You check your own credit report
The key takeaway for soft inquiries is that they won’t affect your credit score because they’re not applications for credit.
Hard Inquiries
A hard inquiry happens when a potential lender requests your credit report to help evaluate whether to offer you credit. Examples include applying for a:
Mortgage
Car loan
Credit card
Why inquiries matter
Though soft inquiries will show up on your credit report, they will have no effect on your perceived creditworthiness. Hard inquiries, on the other hand may be factored into credit scoring models. Though hard inquiries are generally seen to have a negative effect on credit scores, the impact of each inquiry isn’t usually too big. However, too many hard inquiries on your credit report may drag your credit score down, especially over the shorter run.
Here’s the good news on hard inquiries: they’ll fall off of your credit report after 2 years. Also, if you make a certain amount of hard inquiries within a short period of time when you’re loan shopping for a single purchase (like a mortgage), credit scoring models will generally consider all those hard inquiries to be one inquiry – they don’t want to penalize you for shopping around for the best deal.
Bottom line, don’t worry about soft inquiries, but keep an eye on your hard inquiries.
When it comes right down to it, you really do want to find out if something is wrong before it's too late. Identity theft is a great example. If someone is using your personal information—your name, address, credit cards, etc. — you want to find out as soon as possible. Credit Monitoring may not seem like something you need to do but it doesn't take long for someone to open accounts in your name, take out loans, or buy a car. A lot of damage can be done in a short amount of time.
But what about credit monitoring?
With good credit monitoring, you can catch things before they spread. It's the financial equivalent of a regular checkup. You get tips about credit card utilization and how credit inquiries can influence your credit score. Every little bit helps.
Also, unfortunately, mistakes happen. As an example: a university could report a student as late on loan repayment — even when the student is still enrolled full-time. This could happen without anyone even sending a bill — a simple clerical error. Suddenly, a credit report is showing the loan as 30 days late, then 60, 90, 120, and all without the individual's knowledge. The reality is that errors happen, and if you aren't monitoring your credit report, you often don't find out until you've been denied for something, like a new line of credit, or more credit on an existing line. And mistakes of this kind aren't easy to sort out. It can take months, or longer.
Or what if you're planning on buying a new house? You think your credit is in order until the bank denies your application. Why? Apparently you owe hundreds of dollars in interest on a purchase you never even made. Our advice? Stay on top of it. Monitor your credit report. Have access to it every single day.
You can find the original article on TrueCredit
