Lenders, employers, insurance companies and landlords all have good reasons for wanting to review your past credit history. Whenever a business requests a copy of your credit report from the credit bureaus, a credit inquiry appears within your file noting the request. In some cases, credit inquiries can damage your credit scores.
Soft Inquiries
Soft credit inquiries are those that, although recorded in your credit file, do not affect your credit scores. Employers and insurance companies conduct soft credit inquiries. Whenever you pull your credit report for review, you also conduct a soft inquiry. The credit scoring systems do not take soft inquiries into account when determining consumer credit scores, because soft credit inquiries indicate a need for general information that is not directly connected to a new or old debt.
Hard Inquires
Unlike soft inquiries, hard inquiries, such as those made by credit card companies, mortgage lenders and collection agencies, have a negative effect on your credit scores. Although each individual's credit score fluctuates to a different degree depending on his credit information, when a business performs a hard inquiry, most hard inquiries only drop credit scores by five to seven points.
Loan Shopping
The credit bureaus understand that, in order to locate the best rates on a loan, individuals must shop around to a variety of different lenders. Because lenders must pull your credit report before providing you with an accurate loan quote, numerous hard inquiries may take place before you find the right loan to suit your needs. In order to prevent consumers from suffering extensive credit damage while loan shopping, the credit bureaus give consumers 45 days in which to freely shop for the best rates without incurring a hard inquiry beyond that of the initial lender.
Lender Evaluation
Upon pulling your credit report, lenders can not only review your past debts and payment information, they can also review any hard inquiries other businesses have made. Lenders cannot, however, view any soft inquiries on your credit report. Although soft inquiries appear when you review your credit history, these records are only available to you -- not to any third party. Reviewing an applicant's recent credit inquiries helps lenders determine the risk he presents to the company, since applying for multiple credit cards over a short period of time or having inquiries from a collection agency indicates that the applicant could be in financial distress.
Permissible Purpose
The Fair Credit Reporting Act or FCRA notes that a business or individual can only access a consumer's credit history with permissible purpose. If it lacks permissible purpose, a company must obtain your permission before pulling your credit files. Although hard inquiries do not typically have a significant impact on your credit scores, you can demand that any company that conducted an inquiry without your permission or without permissible purpose remove its inquiry. If the company fails to do so, the FCRA grants you the right to file a lawsuit against the inquirer.
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