It might seem obvious at first about what a credit inquiry is. Someone checks up on a credit report. When someone does indeed look up someone's credit, the request is listed on the report as an inquiry. Easy enough, right? But there are different types of credit inquiries. Credit inquiries can be listed as 'hard' or 'soft'. What's the difference?
A hard inquiry is when a consumer makes a new request for some type of loan. When someone applies for an automobile loan, that inquiry is then noted on the report. A soft credit inquiry is when a potential creditor looks into your credit report to see if you might be eligible for a new credit card or auto loan.
How do inquiries affect someone's credit score? It depends. If someone is looking around for the best auto loan, they will make multiple inquiries. When applying for the same type of loan over a limited period of time, there are no negative impacts. On the other hand, when making a request for a new credit card and then another credit card and then an automobile loan, you can expect credit scores to begin to fall. If the requests occur over a relatively short period of time, there will be no impact. If multiple credit requests are spread out over say six months, there can be an impact.
Multiple hard inquiries can signal to a lender the applicant might be falling on some hard times and multiple credit accounts are needed just in order to pay the bills. This will alert a potential creditor that certain new financial instances are occurring, giving the potential lender pause.
Consumers can also check the status of their personal credit scores by logging onto the annualcreditreport.com app. This is a free service provided by the three main credit reporting bureaus. This is considered an inquiry but not a hard one and won't affect credit scores.
Lenders will also ask a few questions about an inquiry when one is listed but no account taken out. Because most creditors report information once every 30 days, it's possible an inquiry will show up but the fact that the new auto loan is $600 won't show up until the reporting period. That's why lenders can ask for an explanation as to why an inquiry showed up on the report. This is for hard inquiries only. Again, softies won't matter.
Consumers shouldn't freak out if they make a new credit request and their scores will plummet. They won't. It's the repeated requests over a short period of time for different types of credit that will cause scores to fall. A car loan application and then a new credit card app won't be that big of a deal. Scores can be damaged however if multiple requests are made for various types of credit including department store cards, gas cards and others.