Credit Inquiries

Updated on April 11, 2024
Article byGayatri Ailani
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Credit Inquiries?

Credit inquiries refer to formal requests made by lenders, individuals, or entities to access an individual’s credit report information. The primary purpose of these inquiries is to evaluate an individual’s creditworthiness when they apply for loans, credit cards, or other forms of credit. 

Credit Inquiries

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Credit inquiries are initiated when an individual applies for credit, such as a mortgage, auto loan, or credit card. Lenders use the information gathered from inquiries to assess the level of risk associated with extending the loan to a particular individual. These inquiries play a crucial role in the decision-making process, helping lenders determine whether an individual is a reliable borrower. Additionally, individuals may initiate inquiries for personal checks, and entities like employers may conduct background checks as part of employment processes.

Key Takeaways

  • A credit inquiry is a request to access an individual’s credit report information. It is initiated by lenders, individuals, or entities to evaluate creditworthiness for loans or credit applications.
  • Hard Inquiries are generated by credit applications for loans or credit cards, and soft inquiries arise from background checks, self-checks, or pre-approved offers.
  • Hard Inquiries can temporarily lower credit scores by a few points (typically less than five).
  • Soft Inquiries do not affect credit scores; they don’t impact an individual’s creditworthiness.

Credit Inquiries Explained

Credit inquiries involve accessing and reviewing an individual’s credit report by lenders, individuals, or entities. The importance of credit inquiries or credit pull lies in their ability to provide a comprehensive overview of an individual’s credit history and financial behavior. Beyond traditional lending, credit pull influences decisions on loan approvals, interest rates, and credit limits, making them a key factor in various financial transactions where understanding an individual’s creditworthiness is crucial.

Its evolution has been marked by a shift from traditional, manual processes to more streamlined and technologically driven methods. In the past, such checks were often time-consuming, involving extensive paperwork and manual assessments. Today, data analytics and digital technology advancements have revolutionized the credit check landscape. Automated systems can quickly analyze vast amounts of financial data, providing lenders with efficient and accurate insights into an individual’s credit history. The rise of alternative credit scoring models has also broadened the scope of credit checks, allowing for a more inclusive assessment that considers various financial factors beyond the traditional credit report.  

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Types

The two primary categories are:

Credit Inquiries Types

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  1. Hard inquiries (hard credit check or hard credit pull) triggered by credit applications for loans, mortgages, or credit cards allow lenders to evaluate potential risks associated with lending. These inquiries, visible on credit reports, temporarily impact credit scores, typically lowering them by a few points. They persist on credit reports for up to two years, influencing lenders’ future decisions regarding new credit.
  2. Soft inquiries (soft credit check or soft credit pull), in contrast, occur without direct credit applications. They encompass background checks, personal credit checks, or pre-qualified offers. Unlike hard inquiries, soft inquiries don’t affect credit scores. Although visible on credit reports, they serve non-lending purposes and don’t factor into credit score calculations, empowering individuals to assess their credit health without affecting their scores. Understanding these distinctions is vital for managing credit and making informed financial decisions.

Examples

Let us look at some examples to understand the concept better –

Example #1

When Anna applied for a credit card to make online purchases more convenient, the bank conducted a credit inquiry to assess her creditworthiness. The inquiry allowed the bank to review Anna’s credit history and determine the risk of approving the credit card. Fortunately, the process was quick, and Anna received approval, demonstrating how credit pulls, or checks play a role in everyday financial decisions.

Example #2

After finding the perfect car at the dealership, Alex decided to finance the purchase through an auto loan. The lender initiated a credit inquiry to understand Alex’s credit history and assess the risk of approving the loan. The inquiry influenced the loan terms, such as the interest rate and repayment period. This experience highlighted how credit pulls impact major life decisions, like buying a car, by shaping the transaction’s financial terms.

How To Remove?

When it comes to removing credit inquiries, individuals can follow a structured process:

  • Identification of Unrecognized Inquiries: The individual should carefully review their credit report to identify any inquiries they didn’t authorize or recognize. Ensuring the legitimacy of these inquiries is crucial before taking further steps.
  • Contacting the Creditor or Lender: If an unauthorized inquiry is identified, reaching out to the associated creditor or lender is the next step. By initiating contact, individuals can request clarification about the inquiry and ask for its removal if it’s deemed unauthorized or erroneous.
  • Filing a Dispute with Credit Bureaus: An individual should the lender fail to resolve the issue, or if the inquiry remains in dispute, individuals can proceed to file a formal dispute with the credit bureaus. Providing evidence and documentation supporting the claim of an unauthorized or inaccurate inquiry is essential.
  • Drafting a Dispute Letter: The individual should compose a formal dispute letter detailing their personal information, the disputed inquiry, and reasons for disputing it. Including any relevant supporting documents is crucial.
  • Submission of Dispute to Credit Bureaus: Sending the dispute letter via certified mail to the credit bureau(s) reporting the inquiry is the next step. Keeping copies of all communications and documents for record-keeping purposes is advisable.
  • Follow-Up with Credit Bureaus: Individuals should follow up with the credit bureaus to ensure the credit check is under review. Staying updated on the progress and resolution of the dispute is important.
  • Continuous Monitoring of Credit Reports: Regular credit report monitoring is essential. Individuals should watch for any updates or changes regarding the disputed inquiry. The credit bureau will communicate its findings and any actions taken in response to the dispute.

How Does It Affect Credit Score?

Hard pulls can have a modest impact on an individual’s credit score, causing a temporary decrease of a few points, with a potential drop of up to 10 points in some cases. According to Fair, Isaac and Company (FICO), a single additional hard pull typically results in a minor reduction of less than five points for most individuals. These inquiries can remain on the credit report for up to two years, but FICO considers only inquiries made within the past 12 months when calculating the credit score. This means inquiries older than a year no longer factor into the FICO credit score calculation.

Conversely, soft pulls do not influence an individual’s credit score. Even though these inquiries might appear on the credit report, they do not impact the credit score. Soft inquiries commonly occur during self-checks of the credit report, background checks conducted by employers or pre-approved credit offers.

Frequently Asked Questions (FAQs)

What is a credit inquiry form?

It is a form of document or online application that individuals fill out when applying for credit, such as a loan or credit card. It gathers the necessary information to initiate a check, allowing lenders to assess an individual’s creditworthiness.

What is a credit inquiry explanation?

A “credit inquiry letter of explanation” is a document you might be asked to provide to a lender or creditor when there are multiple inquiries on your credit report and the lender wants clarification regarding those inquiries. This letter is your opportunity to explain the circumstances surrounding the inquiries and provide context to the lender.

Do credit inquiries go away?

Yes, it can go away. Hard pulls, generated when applying for credit, typically stay on credit reports for up to two years. However, their impact on credit scores diminishes over time. After 12 months, these checks no longer factor into the FICO credit score calculation, providing a natural expiration period. Soft pulls, often used for background checks or self-checks, don’t impact credit scores and generally don’t appear on credit reports visible to lenders.

This article has been a guide to what are Credit Inquiries. Here, we explain its types, examples, how to remove it, and how it affects credit scores. You may also find some useful articles here –

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