Credit requests are a fact of life, whether you are seeking a new credit card, a home mortgage, or a loan for a major purchase like a new or used car. These inquiries are part of the financial data that make up your Equifax, Experian and TransUnion credit reports. Like most of the other data in your credit bureau files, they affect your credit score.
Definition
Credit requests that result from a credit application are known as "hard inquiries," according to the MyFICO credit-scoring website. Such inquiries become part of the applicant's credit record, and remain visible to other lenders for up to two years from the application date.
Effects
A single credit request lowers your overall credit score by up to five points. You will lose more points if you have very few accounts, or do not have a very long credit history. The damage is minimal if your score is high, but a five-point loss can do serious damage if your score is already on the borderline between average and low. MyFICO warns that six or more requests look very bad, because credit applicants with at least six hard inquiries are eight times more likely to file bankruptcy than their counterparts with no inquiries. Creditors may shy away from approving these applicants because of the elevated risk.
Rate Shopping
Not all hard inquiries have the same effect on your credit score. Credit-scoring formulas recognize certain clusters of activity as "rate shopping" for big loans like mortgages or cars. Thus, they lump together all inquiries for a certain type of loan within a specific period, and score them as a single application. The time is either 14 or 45 days, depending on the applicable scoring formula.
Soft Inquiries
"Soft inquiries" also appear on your credit reports. These are usually promotional inquiries. For instance, credit card companies and insurers purchase data from the credit bureaus, and send you preapproved offers if you meet certain financial criteria. You also make a soft inquiry if you order copies of your own credit reports for personal review. Soft inquiries have no effect on your credit score.
Monitoring
You can monitor hard and soft inquiries by reviewing the free annual credit reports to which federal law entitles you. The Federal Trade Commission explains that you must order the free reports through AnnualCreditReport.com (see Resources). You can request one report per year from each credit bureau. Each report will list your hard and soft inquiries for the previous one to two years.
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