Everything You Wanted To Know About Credit Inquiries, But Were Afraid To Ask.

Most of us have applied for a car loan or a home loan. And most of us have received any number of pre-approved credit card offers in the mail. Did you know that both of these scenarios will generate a credit inquiry on your credit file?

Here is a quick breakdown of credit inquiries.

Hard inquiry
Hard inquiries are those you initiate when you apply for credit including a loan or credit card. In doing so, you have authorized the lender to pull a copy of your credit report. The legal term is called "permissible purpose." But what's important to remember is that you are the only one who can authorize a creditor to perform a hard inquiry on your credit report.

Now, you may ask, "If I rate-shop for the best loan rates, won't my credit report be smothered in hard inquiries?" The answer is probably not. You see, most of today's credit scoring models, especially those used by the three national credit reporting companies, recognize that many consumers rate-shop before making a major purchase. Since this may cause multiple lenders to request your credit report, to compensate, multiple mortgage or auto inquiries over a short period are counted as one inquiry.

One final word on hard inquiries: they are the only type of inquiry that counts toward your credit score and stay on your credit report for two years.

Soft inquiry
A soft inquiry is one that does not constitute an official request for credit. For example, a company sends you a "pre-approved" or "invitation to apply" credit card offer. This will appear on your credit report, but can only be seen by you, not lenders, and will not be used in the calculation of your credit score.

Other soft inquiry examples include those from prospective employers or landlords, inquiries from lenders where you have an existing account, and inquiries to see your own credit report. (That's right, checking your own credit report does not affect your credit score.)

The bottom line

In the grand scheme of credit scoring models, inquiries typically have a fairly small impact on your credit score. However, too many hard inquiries can raise a red flag for creditors.

Finally, it's wise to check your credit report and credit score approximately six months before you intend to make a major purchase. That way, you will have enough time to correct any inaccurate or unauthorized information on your credit report before you apply for your loan.