Today, many Americans have a pretty solid understanding of how credit scores work. Thanks to the internet and the many, many resources it offers, we know what makes scores go down, and we know how to bring them back up again.
Among the worst things for your credit score are defaults, late payments, and high balances. However, hard credit inquiries can damage your credit score, too -- and as one woman found out, if you're not paying attention, they can really add up.
Valerie Thompson of Sharonville, Ohio recently went shopping for a used car. To ensure she got the best interest rate, she submitted loan applications at four different dealerships.
Each of those dealerships, in turn, submitted Thompson's application to a number of lenders -- 27 in all. Each of those 27 inquiries counted as a hard credit inquiry.
SOFT INQUIRIES VS. HARD INQUIRIES
Soft inquiries aren't usually recorded on credit reports, and they don't affect your credit rating. They can be pulled when you're renting a car or an apartment -- you can even pull one on yourself, when you're checking your own credit score. Soft inquiries are often what lead to pre-approvals on loans.
Hard inquiries, however, are always recorded, and more than a couple can really knock your credit score for a wallop. Hard credit inquiries are usually the "brass tacks" of the loan process, taking place when you've agreed on a lender and begin the formal process of taking out a loan. This is often when you realize that your "pre-approval" rate or loan amount and the actual interest rate or loan amount can differ dramatically.
You may have perfectly legitimate reasons for applying for credit, but to lenders, having too many hard inquiries on your record sends up a red flag that you may be having trouble meeting your obligations.
However, lenders also understand that smart consumers shop for good rates. That's why they tend to ignore multiple inquiries made for the same loan filed within certain window of time. (That window can vary from credit agency to credit agency, but in Thompson's case, it was 14 days.) So, a broker may apply to a dozen lenders, but as long as those applications are filed within a specific time period and lead to just one loan, they typically count as just one hard inquiry on the borrower's credit report.
Unfortunately, Thompson applied at four different dealerships, meaning that four brokers were filing applications on her behalf. It appears that each of those applications involved a hard credit inquiry, and although the details aren't clear, it's possible that she exceeded the window of time allotted to her. Thompson says that the hard credit inquiries stayed on her credit report, reducing her overall credit score by 20 points.
Thompson approached the credit agencies to remove the inquiries from her record, but they instructed her to speak to the dealerships, who instructed her to speak to the banks, who sent her back to the dealerships. If she's unsuccessful, those hard inquiries could remain on her credit report, damaging her score, for two years.
We encourage car shoppers to shop around for loans, too. In fact, we encourage you to look for loans before you head out to dealerships. You may find a rate that's perfect, you may not, but at least you'll know -- roughly -- what you can expect in the way of interest rates.
Using brokers like Lending Tree to get the lay of the land won't ding your credit. They typically run soft inquiries, just to get your credit score. Using that score, they'll match you with lenders, who will offer preliminary rates. The hard inquiries won't usually start until you commit to one lender or another. (If you're not sure whether a lender is making a hard or soft query, ask -- and if you can, get it in writing.)
If you do decide to go through a dealership, take care to guard your personal information. No one can run a hard credit inquiry without your full address, social security number, and other details.
And no matter which route you take, once you start the hard inquiries, try to complete the loan process within a couple of weeks. Doing so ensures that credit agencies will see you as a diligent shopper rather than a credit risk.