To understand how applying for new credit affects a credit score, it is imperative to
understand what a credit score is. Our blogpost published May 2019
https://crccreditbureau.com/blog/how-to-build-your-credit-score-in-2019 defines credit scores
and provides insights into the importance of maintaining a good credit score as well as
practical tips on how to monitor it. Therefore, applying for new credit may impact your credit
score, but the application alone is not nearly as important as how you use your new account.
Credit scores can be viewed by the consumers who own the scores or by financial
institutions and credit granters who are prequalifying customers for loans, reviewing an
application for a loan, increasing or decreasing credit lines. These are called “soft” and
“hard” inquiries.
Every loan request to a financial institution and/or credit granter enables them to view your
credit profile as they are required to examine your credit score and/or history, along with
other documents provided, to determine your creditworthiness. When the lender requests a
credit report for the purpose of evaluating a loan application, it's often referred to as a "hard
inquiry" or a "hard pull."
Each hard inquiry gets added to the credit report and can have an effect on the credit score.
This is due to the fact that credit scoring models may interpret multiple new inquiries in
various ways. These ways range from pursuit of new credit lines for various purposes
separate from present circumstances to possible signs of financial distress.
Hard inquiries are just one of many factors that make up a credit score and once too
frequent can reduce the credit score by a few points. The reduction in a credit score by a few
points may be regarded as a minor factor and thus may not negatively impact a credit score.
However, six or more hard pulls can significantly affect a credit score negatively and infer
bankruptcy to a lender.
CRC Credit scores are computed using some factors and these factors carry different
weights. The factors and the weights attached to them are as follows:
1. Payment history – 35%
2. Credit utilization or how much of available credit in use – 30%
3. Length of credit history – 15%
4. Credit mix, or the different types of credit products in use – 10%
5. Enquiries made by the customer for credit such that customers shopping around for
credit obtain low score here – 10%
Therefore, while a few hard inquiries may reduce a credit score by a few points, repaying
loans taken and carrying a low amount of debt may be far more important to adhere to than
recent inquiries.
Thankfully, some credit scoring models consider multiple hard inquiries in a short period for
certain types of loans, such as auto loans and home mortgages, a single inquiry rather than
multiple enquiries. This is to prevent the credit score of the loan applicant from declining as a
result of interactions with various institutions to take advantage of the best rates.
Soft inquiries or soft pulls, occur when consumers view their individual credit scores or a
lender, credit card issuer or credit granter views a score to preapprove consumer(s) for a
product or service. An example is Insurance companies requesting soft inquiries during the
preapproval process for select insurance products. Regardless of the source of the soft
inquiry on a credit profile, it may appear as an inquiry however it will never affect the credit
score.
In view of the importance of hard inquiries and the effect they have on credit scores, three
questions remain foremost to address.
How Long Does a Hard Inquiry Stay on Your Credit Report?
Hard inquiries will stay on your credit report for two years, but the effect on your credit score
will decrease over time once there are no new hard inquiries.
How to Remove a Hard Inquiry from Your Credit Report
Hard inquiries conducted with the consent of the credit score owner may not be removed
from the credit profile. Instances where consent was not given it may be possible to dispute
the hard inquiry with the lender and or credit granter. Information of this nature may also be
brought to the attention of the credit bureau requesting for the lender for further investigation.
How to Minimize the Effect on Your Credit Score When Applying for New Credit
When applying for new credit, there are a few things that may be done to reduce the impact
of a hard inquiry on the credit score. First, discuss terms and conditions with various credit
granters prior to formally applying for a loan or post-paid product and service. This will
ensure there are no hard inquiries till there is clarity on which lender to apply to.
It remains important for individuals to monitor their credit profiles to see how these new
inquiries affect their credit scores. There are various tools that can be used to achieve this.
One of these tools is CRC Monitors and Alerts. This enables all individuals to have insights
to every new change on their credit profile as they are reported to the credit bureau.
Request for CRC Monitors and Alerts today by clicking on this link
https://crccreditbureau.com/product/monitors-and-alerts-individual
References
1. Does applying for a credit card hurt your credit? (2022)
https://www.bankrate.com/finance/credit-cards/how-a-new-credit-card-can-affect-
your-credit-score/
2. The 5 reasons why your credit score might suddenly drop (2022)
https://www.cnbc.com/select/credit-score-drop/
3. New Credit: What It Is and How It Impacts Your Credit Score (2021)
https://financejar.com/credit-scores/new-credit/