Definition
A hard inquiry, also known as a hard pull, is a type of credit check that occurs when a lender reviews your creditworthiness for approval of loans or credit cards. It typically happens when you apply for a mortgage, loan, or credit card, and you have to authorize them to check your credit. These inquiries can slightly lower your credit score temporarily and stay on your credit report for two years.
Key Takeaways
- A hard inquiry refers to a credit check performed by potential lenders when you apply for larger sums of credit like a mortgage, credit card, or auto loan. It indicates that you’re seeking new credit and could potentially take on more financial obligations.
- Hard inquiries can slightly decrease your credit score temporarily, typically by a few points, and they may remain on your credit report for up to two years. Therefore, it’s important to limit the number of hard inquiries to avoid a significant impact on your credit score.
- Not all inquiries are hard inquiries. Soft inquiries, such as checking your own credit score or pre-approval checks by credit card companies, do not affect your credit score. Knowing the difference between the two types of inquiries can help you manage your credit effectively.
Importance
A hard inquiry, also known as a hard credit check, is a key term in finance and is important for several reasons. It happens when a financial institution, like a lender or credit card issuer, checks a person’s credit for purposes of extending credit or increasing a credit limit.
This is done when a person applies for a loan, credit card, or mortgage. The reason it’s crucial is that a hard inquiry can temporarily lower a person’s credit score, and multiple hard inquiries in a short span can significantly affect one’s credit.
A hard inquiry can stay on a credit report for about two years. Hence, it’s critical to only apply for new credit sparingly and responsibly to avoid an excessive number of hard inquiries, thereby maintaining a healthy credit score.
Explanation
The purpose of a hard inquiry, also known as a ‘hard pull’, is to allow lenders to review your credit history when you apply for credit. Whether you’re applying for a student loan, car loan, business loan, mortgage, or credit card, these institutions need to ensure you’re capable of fulfilling your credit obligations before they approve your application.
With your permission, they carry out a hard inquiry to assess how responsibly you’ve managed your credit in the past. Thus, a hard inquiry serves as an essential risk assessment tool for lenders.
Although the function of a hard inquiry is important for financial institutions, it’s also crucial to be mindful of too many hard inquiries on your credit report, as they could negatively impact your credit score. This is because potential lenders may interpret numerous inquiries as a sign that you’ve been applying for lots of credit and might be a higher lending risk.
Despite this, a single hard inquiry can only lower your credit score by a few points, and its effect often diminishes over time, typically disappearing altogether after about two years. Overall, hard inquiries constitute a necessary process for obtaining credit, but should be understood and managed wisely by borrowers.
Examples of Hard Inquiry
Applying for a Mortgage: When you apply for a mortgage, the lender will perform a hard inquiry to check your creditworthiness. This will help them assess whether you have a history of repaying loans on time and how much debt you currently have. The hard inquiry will temporarily lower your credit score.
Applying for a Car Loan: Car loan lenders will also perform a hard inquiry on your credit report to assess your risk as a borrower. They want to know if you will be able to make your car payments on time and in full every month. The hard inquiry will show up on your credit report.
Applying for a Credit Card: When you apply for a credit card, the card issuer will do a hard inquiry to check your credit score. This is because the credit card company needs to know if you are a risk and whether you can pay your credit card bill every month. This hard inquiry can lower your credit score temporarily.
FAQs on Hard Inquiry
What is a Hard Inquiry?
A hard inquiry, also known as a hard pull, occurs when a lender checks your credit report as part of their decision-making process. This type of inquiry can lower your credit score temporarily and potentially affect your ability to get new credit.
How does a Hard Inquiry affect my Credit Score?
Hard inquiries can slightly lower your credit score for a short period, typically a few months. However, multiple hard inquiries over a short period can have a more significant impact as they could indicate that you’re seeking a lot of credit or you’re having trouble getting approved for credit.
How long does a Hard Inquiry stay on my Credit Report?
A hard inquiry typically stays on your credit report for two years. However, the impact on your credit score usually decreases over that period until it has no impact on your score.
Can a Hard Inquiry be removed from my Credit Report?
In some cases, a hard inquiry can be removed from your credit report. This usually happens if the inquiry was not authorized, or there is a mistake on the report. In such cases, you can dispute the hard inquiry with the credit bureau.
What is the difference between a Hard Inquiry and a Soft Inquiry?
A hard inquiry is when a potential lender reviews your credit because you’re applying for credit with them. This can drop your score a few points temporarily. On the other hand, a soft inquiry is when your credit is checked for reasons other than you applying for new credit, like when you check your own credit, and it does not affect your credit score.
Related Entrepreneurship Terms
- Credit Report
- Credit Score
- Soft Inquiry
- Credit Bureaus
- Credit Application
Sources for More Information
- Investopedia: A comprehensive online source for financial related terms, their definitions and explanations.
- Credit Karma: A website dedicated to providing consumers with free credit monitoring and financial education.
- Experian: One of the big three credit bureaus, this site offers an in-depth look at credit-related topics.
- Consumer Financial Protection Bureau: A U.S. government agency that makes sure banks, lenders, and other financial companies treat consumers fairly.
