Question: How does an inquiry on my credit report hurt my score?
Answer: There are two different types of inquiries, which are also sometimes referred to as "pulls." There are "soft inquiries" and "hard inquiries." They each have different effects on your score.
Soft Inquiries and Scores
Soft inquiries do not hurt your score at all. They can occur without you even knowing about them, and they are not the result of you seeking to borrow. Have you received card offers in the mail? If so, this was most likely the result of a soft inquiry. A card issuer might do a soft inquiry to determine if you're likely to be approved (and worth the expense of mailing an application). This ensures that the issuer is sending offers to a qualified market.
A potential employer might do a soft pull when it conducts a background check on you. Many employers feel, rightly or wrongly, that a candidate's payment history provides some indication of his or her expected job performance. Fair or not, those who have good histories are viewed as more responsible. In this case, you have to give the employer permission to check your report. (Of course, if you say no, that might arouse suspicion that you have something to hide.)
Checking your own report doesn't impact your score at all. So please check it regularly to make sure everything is correct and that there are no signs of fraud. You're entitled to a free report from each of the bureaus and you can request them at annualcreditreport.com. There is a charge for your credit scores. However, you can check your credit and your score for free at LendingTree.com as often as you wish.
Because soft pulls are not the result of you shopping for credit, they are not counted by scoring systems.
Hard Inquiries and Scores
Unlike soft inquiries, hard inquiries often can hurt your score. The extent of the damage depends on a lot of factors pertaining to your own specific history. Generally, though, your score might decrease anywhere from two to five points per inquiry. It's possible that one inquiry won't have an impact at all on your score, but a slew of them could be a red flag for scoring systems. The combination of lots of inquiries and maxed out credit limits points to an unsustainable spending pattern, and scoring systems are designed to pick that up. A hard inquiry is likely to have a bigger impact on those who have a short history or who have very few accounts to their name.
A hard inquiry results when a lender requests your report because you've applied for credit. So if you apply for a car loan, mortgage, or plastic, it will produce a hard inquiry. Remember how each inquiry can reduce your score? Well, the FICO score makes an exception for what's called "rate shopping." This occurs when you are looking for a mortgage, for example, and you're trying to find the best rate. The FICO score gives a short window for rate shopping. The exact amount of time depends on which FICO score version is used, but the time period ranges from 14-45 days. So try to get your rate shopping done within two weeks just to be on the safe side.
To be clear, applying for cards is not rate shopping. Applying for cards frequently is often interpreted by lenders as a sign of greater risk. So trying to get approved for several cards within a short time period not only reduces your score, but it can make a lender feel that you're too risky to take a chance on.