Managing your credit score is crucial for small business owners, as it directly impacts your ability to secure financing and favorable terms. One aspect of credit management that often causes concern is the presence of hard credit inquiries on your credit report.
These inquiries occur when a lender checks your credit report as part of a credit application process. While they are necessary for obtaining credit, understanding their impact and how long they stay on your credit report can help you manage your credit health more effectively.
In this article, we’ll delve into what hard inquiries are, how they affect your credit score, and strategies for managing them.
Understanding Hard Inquiries
What Are Hard Inquiries?
Hard inquiries, also known as “hard pulls” or “hard credit checks,” occur when a financial institution, such as a lender or credit card issuer, reviews your credit file to make a lending decision. This typically happens when you apply for a mortgage, car loan, or credit card, and you generally need to authorize it.
Hard inquiries differ from soft inquiries in several key ways:
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Impact on Credit Score: Hard inquiries can lower your credit score by a few points, usually less than five, whereas soft inquiries do not affect your score.
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Visibility to Lenders: Hard inquiries are visible to other lenders on your credit report, while soft inquiries are only visible to you.
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Purpose: Hard inquiries usually occur when you’re actively seeking credit, while soft inquiries can happen without your direct involvement, such as for pre-approval offers or background checks.
Impact on Credit Scores and Credit Report
A single hard inquiry typically has a minor and temporary effect on your credit score:
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It can lower your score by a few points, generally less than five.
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The impact usually lasts less than a year, although the inquiry remains on your credit report for up to two years.
For those with a long credit history and high scores, a single hard inquiry may have little to no impact. However, multiple hard inquiries in a short period can have a more significant effect:
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They may signal to lenders that you’re a higher-risk customer.
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This could potentially lead to loan denials or less favorable terms.
It’s worth noting that credit scoring models typically treat multiple inquiries for certain types of loans (mortgages, auto loans, or student loans) within a short timeframe (usually 14-45 days) as a single inquiry. This allows consumers to shop around for the best rates without excessive damage to their credit scores.
Managing Hard Inquiries
Understanding the nature of hard inquiries helps in managing their impact on your credit score. For business owners, this knowledge is crucial for maintaining a healthy credit profile, which can affect your ability to secure financing for your business operations and growth. Checking your own credit is considered a soft inquiry or soft pull, and it does not have an impact on your credit scores.
The Impact of Hard Inquiries on Your Credit Score
Understanding the effects of hard inquiries on your credit score is crucial for managing your credit effectively. These inquiries can have both immediate and long-term impacts that small business owners need to be aware of. In contrast, a soft inquiry occurs when you check your own credit, receive pre-approved credit offers, or when a potential employer checks your credit as part of a background check, and it does not affect your credit score.
Immediate Effects
Each hard inquiry can temporarily lower your credit score by a few points. Here are some specific findings:
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FICO Impact: According to FICO, a hard inquiry from a lender will decrease your credit score by five points or less. For most people, one additional credit inquiry will take less than five points off their FICO Scores.
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VantageScore Impact: VantageScore, another credit scoring model, reports that a hard inquiry can shave up to 10 points off a credit score.
While the impact is minor for a single inquiry, multiple inquiries can compound and potentially have a more significant effect on your score. However, it’s important to note that:
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The impact is usually temporary, with scores typically bouncing back up within a few months, assuming all other credit factors remain positive.
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Hard inquiries account for about 10% of a FICO Score, making them less impactful than other factors like payment history or credit utilization.
Compounding Effects and Exceptions
Credit scoring models recognize that consumers may shop around for the best rates, particularly for certain types of loans. As a result:
- Rate Shopping Exception: Multiple inquiries for mortgage, auto, or student loans within a 14-45 day period (depending on the scoring model) are typically treated as a single inquiry. This “rate shopping” exception allows consumers to compare offers without excessive damage to their credit scores.
However, this exception generally does not apply to credit card applications, where each application will likely result in a separate hard inquiry.
Long-Term Considerations
While the immediate impact of hard inquiries is often small, there are some long-term factors to consider:
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Duration on Credit Report: Hard inquiries remain on your credit report for two years. However, they typically only affect FICO Scores for one year.
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Risk Assessment: People with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries, according to FICO.
Understanding these impacts can help in planning credit applications and minimizing their effect on your credit score. It’s generally advisable to space out credit applications when possible and to be strategic about when and how often you apply for new credit. This approach can prevent unnecessary credit score drops and help maintain a healthy credit profile, which is essential for securing financing for your business operations and growth.
Managing Hard Inquiries
Effectively managing hard inquiries is essential for maintaining a healthy credit score, especially for small business owners who often need to secure financing. Here are some strategies to help you minimize the impact of hard inquiries on your credit report.
Minimizing Hard Inquiries
Limiting the number of hard inquiries is essential for maintaining a healthy credit score. Here are some tips to minimize hard inquiries:
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Be Strategic About Credit Applications: Only apply for new credit when absolutely necessary. Each application triggers a hard inquiry, so it’s important to be selective.
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Space Out Applications: If you need to apply for multiple forms of credit, try to space them out over time. This can help reduce the cumulative impact on your credit score.
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Use Prequalification Offers: Many lenders offer prequalification processes that use soft inquiries instead of hard inquiries. Prequalification can give you an idea of your chances of approval without affecting your credit score. Checking your own credit report also falls under soft inquiries and does not affect your credit score.
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Shop Around Within a Short Period: If you are shopping for a mortgage, auto loan, or student loan, try to do so within a short period. Credit scoring models typically treat multiple inquiries for the same type of loan within a 14-45 day period as a single inquiry. This allows you to compare rates without significantly harming your credit score.
By being strategic about credit applications, you can effectively manage the number of hard inquiries and maintain a healthier credit score.
Removing Unauthorized Inquiries
Unauthorized hard inquiries can negatively impact your credit score. Here’s how to handle them:
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Regularly Monitor Your Credit Report: Check your credit report regularly to identify any unauthorized or suspicious inquiries. You can get a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year through AnnualCreditReport.com.
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Dispute Unauthorized Inquiries: If you find unauthorized hard inquiries, you can dispute them with the credit bureaus. Here’s how:
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Contact the Credit Bureau: Write a letter to the credit bureau that issued the report with the unauthorized inquiry. Include your personal information, a description of the error, and any supporting documentation.
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Provide Proof: Include copies of any documentation that supports your claim, such as a police report if the inquiry is a result of identity theft.
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Follow Up: The credit bureau will investigate your claim, usually within 30 days. They will remove the unauthorized inquiry if they find it to be incorrect.
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Successfully removing unauthorized inquiries helps in maintaining an accurate credit score. Ensuring the accuracy of your credit report protects your credit health and reduces the risk of being unfairly penalized for inquiries you did not authorize.
The Role of Credit Bureaus, Scoring Models and Credit Reports
Understanding how credit bureaus handle hard inquiries and how different credit scoring models view them is crucial for effectively managing your credit. This section will explore these aspects to help small business owners better navigate the credit landscape.
How Credit Bureaus Handle Hard Inquiries
Credit bureaus play a key role in tracking and reporting hard inquiries on your credit report. Here’s how they handle them:
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Tracking Inquiries: Credit bureaus like Equifax, Experian, and TransUnion track all hard inquiries made on your credit report. Each time you apply for new credit, the lender performs a hard inquiry, which is then recorded by the credit bureaus.
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Reporting Inquiries: These inquiries are reported on your credit report and are visible to other lenders who review your credit history. This transparency allows lenders to assess your recent credit-seeking behavior and gauge your risk as a borrower.
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Impact Duration: Hard inquiries remain on your credit report for two years. However, they typically only affect your FICO Scores for one year. After this period, while the inquiry is still visible, it no longer impacts your credit score.
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Dispute Resolution: If you find any unauthorized or incorrect inquiries on your credit report, you can dispute them with the credit bureaus. They are required to investigate and remove any inaccuracies within a reasonable period, usually 30 days.
Understanding how credit bureaus operate can help you manage your credit more effectively, ensuring your credit report accurately reflects your financial behavior.
Credit Scoring Models and Hard Inquiries
Various credit scoring models, such as FICO and VantageScore, weigh hard inquiries differently. Here’s how these models handle hard inquiries:
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FICO Scores:
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Weight of Inquiries: Hard inquiries account for about 10% of your FICO Score. While this is a relatively small percentage, multiple inquiries can still have a noticeable impact.
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Immediate Impact: A single hard inquiry typically lowers your FICO Score by less than five points. The impact is generally temporary, lasting less than a year.
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Rate Shopping: FICO Scores treat multiple inquiries for mortgage, auto, or student loans within a 14-45 day period as a single inquiry. This allows consumers to shop for the best rates without significantly affecting their credit score.
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VantageScore:
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Weight of Inquiries: Similar to FICO, hard inquiries make up a small portion of the VantageScore model.
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Immediate Impact: VantageScore reports that a hard inquiry can reduce your credit score by up to 10 points.
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Rate Shopping: VantageScore also treats multiple inquiries for the same type of loan within a short timeframe as a single inquiry, helping consumers shop around without major penalties.
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Knowing the differences between these scoring models can help you understand how your score might be affected by hard inquiries. This awareness is crucial for accurate credit score management and for making informed decisions when applying for new credit.
Frequently Asked Questions about Hard Inquiries
Many small business owners have questions about hard inquiries and their impact on credit scores. This section addresses some of the most common concerns to help you manage your credit more effectively.
Can You Remove Hard Inquiries from Your Credit Report?
Hard inquiries that are valid cannot be removed, but errors can be disputed. Here’s what you need to know:
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Valid Hard Inquiries: If you applied for credit and a hard inquiry was made, it will remain on your credit report for two years. Valid inquiries cannot be removed, as they are part of your credit history.
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Unauthorized Inquiries: If you notice an unauthorized or incorrect hard inquiry on your credit report, you can dispute it with the credit bureaus. Here’s how:
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Check Your Credit Report: Obtain your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to review for any unauthorized inquiries.
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Dispute Process: Contact the credit bureau that issued the report with the unauthorized inquiry. You will need to provide information about the disputed inquiry and any supporting documentation.
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Resolution: The credit bureau will investigate your claim and remove the unauthorized inquiry if they find it to be incorrect. This helps ensure your credit report accurately reflects your credit history.
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Regularly checking your credit report helps in identifying and disputing errors, which is crucial for maintaining an accurate credit score.
Does Your Credit Score Go Up When Hard Inquiries Fall Off?
When hard inquiries fall off your credit report, your credit score may see a slight improvement. Here’s what to expect:
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Minor Impact: Since hard inquiries account for about 10% of your FICO Score, their removal can result in a minor increase in your score. However, the exact impact depends on your overall credit profile.
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Recovery Over Time: Credit scores typically recover from the impact of hard inquiries within a few months if other credit factors remain positive. The removal of these inquiries after two years can contribute to a gradual improvement in your score.
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Proactive Credit Management: Regular monitoring of your credit report helps you understand the changes in your credit score over time. This awareness aids in long-term financial planning and maintaining a healthy credit profile.
Understanding the Limits of Removal
It’s important to understand that while valid hard inquiries cannot be removed, proactive credit management and regular monitoring can help you maintain an accurate credit report. By being vigilant and addressing any unauthorized inquiries promptly, you can protect your credit health.
Conclusion
Managing your credit score is essential for small business owners, as it can significantly affect your ability to secure financing and favorable terms. Understanding hard inquiries, their impact on your credit score, and strategies for managing them can help you maintain a healthy credit profile.
In this article, we explored the nature of hard inquiries, their immediate and long-term effects, and how they are handled by credit bureaus and scoring models. By minimizing unnecessary hard inquiries and disputing unauthorized ones, you can protect your credit score. Additionally, being aware of how credit bureaus and different scoring models view these inquiries can guide you in making informed credit decisions.
Regularly monitoring your credit report, spacing out credit applications, and using prequalification offers are practical steps to manage hard inquiries. For small business owners, maintaining a strong credit score is crucial for securing the financing needed for business growth and operations.
By applying the insights and strategies discussed in this article, you can navigate the complexities of credit management more effectively, ensuring your business has access to the financial resources it needs to thrive.