Hard Inquiries: How Detrimental Are They To Your Credit Score?

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Lenders and banks check your credit before they approve you for new credit cards or loans. They do this to be sure that in the past you've paid your debts on time. If you have, you are more likely to pay your new loan or credit card payments on time.

When lenders check your credit in response to your request for a new loan or credit card,  it's known as a hard inquiry. These inquiries are listed on your three credit reports. And each inquiry could cause your three-digit credit score to dip by about five points.

Why? The more credit or loan debt you take on, the more likely you are to miss payments. Lenders are especially worried that if you apply for several credit cards or loans at once, you're preparing for a spending spree that you might not be able to pay back on time.

The damage is only temporary

The good news is that a drop of five points isn't much damage. If your score is 810 and a hard inquiry drops it to 805, lenders will still consider your credit score to be excellent.

And the credit dip isn't permanent. Your score will gradually rise again if you continue to pay your bills on time each month and if you pay off or pay down your credit card debt. Those two factors — on-time payments and using as little of your available credit as possible — have far greater impact on your credit score than hard inquiries.

Some more good news: If you are shopping around for the lowest cost mortgage or auto loan, all the hard inquiries received in a short period of time are counted as a single inquiry. In other words, even if you are shopping among different lenders for the lowest fees and interest rates, your credit score will still only take a small dip from the hard inquiries.

Keep checking your own credit reports

You can check your three credit reports for free at AnnualCreditReport.com. Don't hesitate to do this; checking your own credit is known as a soft inquiry. This type of inquiry won't hurt your credit at all. And by checking your credit regularly, you'll get a better idea of the steps you need to take to improve your credit score.

The difference between hard and soft inquiries is important. More importantly, don't let the fear of a hard inquiry keep you from applying for a new loan or credit card. The damage to your credit score is minor and temporary.

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