There’s lots of information about you listed inside your credit report. Of course, most of the information pertains to your credit history. In fact, nearly two-thirds of your credit score is made up of payment history along with comparing current account balances with credit lines. For consumers who want to improve or repair their credit, concentrating on these two categories alone will do the most good.
One other category also contributes to the overall score referred to as “credit inquiries.” While credit inquiries don’t directly affect the score, it does so if a new credit account is opened. An occasional request for new credit won’t harm a credit score but repeated ones will.
Credit inquiries fall into two categories, sometimes referred to as a “soft” and a “hard” inquiry. A hard inquiry is one where the consumer makes a direct request for new credit. That request can be for something like a car loan or even a new credit card. Each time someone applies for a car loan, the lender looks up the credit history of the potential borrower, while at the same time listing the inquiry on the report. The inquiry will show who made the hard request and the date. Used properly with timely payments, the initial inquiry ultimately helps a credit score.
But, if you have multiple inquiries over a limited span of time, this will give a lender a reason to raise an eyebrow. If you think about it, what would a lender think if over the past few years the consumer used credit responsibly with a car loan, a credit card, and a mortgage payment? Suddenly, however, say over the course of the last 90 days, multiple hard inquiries hit the credit report? If no new credit lines were issued, a lender would want to know what’s going on. Why all the requests? Is someone suddenly out of work or soon will be? Was there some sort of loss of income that has occurred?
When inquiries pop up, lenders will often ask for a letter of explanation. This is an official term used in the mortgage business; but in essence, it’s a letter written by the borrower providing an explanation about some facet of their credit history. With a hard inquiry, the lender will want more information.
When you consider that most businesses who issue credit report credit activity once every 30 days. With a credit inquiry, if a new account was indeed established, it won’t appear as an active credit line until the reporting period has arrived. The lender doesn’t know if the credit inquiry for a new car, for instance, means someone was just testing the waters and didn’t buy the car after all, or if a new loan was taken out and the monthly payments are $600 per month.
A soft inquiry, on the other hand, is when a company researches credit histories to see if an individual meets their credit profile. If so, an offer to apply for a credit card or car loan might come in the mail or an inbox. The consumer is not aware of this inquiry because the consumer didn’t initiate the request. A soft inquiry can also come from other types of businesses that use credit to make a business decision. Auto insurance or online microloans are a good example of this. Soft inquiries don’t affect credit scores.