How Are Hard Credit Inquiries Used To Check Borrower Creditworthiness

Whenever a borrower applies for a credit card or loan, the lender must know the creditworthiness of the applicant to determine if the borrower will be able to pay the regular monthly installment. Therefore, a ‘hard credit check’ is required to run a background check on the borrower’s past and current financial history. 

This check looks at the credit score of the borrower and pulls the payment history to give the lender a fair idea about the repayment reliability of the borrower in question. The lender must request the credit file of the borrower from the credit bureau to get the required information. This process results in a ‘hard inquiry’ (another phrase for hard credit check) that will later appear on the borrower’s credit report.

Not all credit history checks are considered hard inquiries. There is another type of inquiry that a lender can request which does not show up on the borrower’s credit report which is referred to as soft inquiry. This type of check follows different procedures and often occurs when either a borrower checks their own credit score or a lender checks the borrower’s credit report for a pre-approved credit offer.

The Impact Of Hard Inquiries On Credit Scores

A credit score is a three-digit number that represents a borrower’s capability to repay debt. It is a demonstration of a person’s credit history that helps the lender determine the amount of risk posed after lending to a borrower.

The higher the credit score, the more creditworthy the borrower. Generally, a score of 700 or higher is deemed good in the score range of 300 – 850. Based on a borrower's length of credit history, repayment history, number of open accounts, and amount of debts and new credit, a credit score is calculated.

Every hard inquiry causes a borrower's credit score to temporarily fall. The deduction of score usually depends on the borrower's credit history and other information mentioned in the credit report but typically a single inquiry can deduct 5 to 8 points from your credit score. For people with strong financial histories, a hard inquiry has little to no effect on the credit score. By comparison, a soft inquiry has no impact on credit scores.

When a borrower makes multiple applications for a credit card or loan within a period of 14 to 45 days, it is counted as a single inquiry. Conversely, if applications are made for multiple credit cards or loans in a short period, then every attempt will be treated as a separate inquiry resulting in a significant drop in scores.

This might highlight a borrower’s financial difficulties, which could be viewed as a higher risk for potential lenders.

How Long A Hard Inquiry Lasts On Credit Reports

A hard inquiry can last on your credit report for as long as 24 months. All the inquiries made during this interval will be available to lenders when an application for credit is made. However, the inquiries generally only affect the credit score for 12 months.

When attempting to build credit, every point is important. Hard inquiries can result in a substantial dent in your credit, but measures can be taken to improve the score over time. By paying bills on time, applying for or opening new credit accounts only when required, avoiding multiple hard inquiries, not applying for a huge credit limit and paying down debts consistently, scores will gradually rise, helping recover lost points quickly.

Conclusion

A good credit score can positively impact many aspects of a borrower’s financial life. It makes qualifying for many types of credit more accessible and affordable thanks to better repayment terms and lower APR rates. On the other hand, qualifying for a loan can be quite difficult with a poor credit score.

Even if a low credit score borrower qualifies for an installment loan, they are generally offered worse terms and higher interest rates. Therefore, maintaining a high credit score and strong credit history is essential for expanding your affordable borrowing opportunities.

Always keep an eye on your credit score and try avoiding submitting multiple credit applications that require hard inquiries. If a hard inquiry is inevitable at all, then apply for credit only when needed. Together, these steps will help you ensure a high credit score and strong credit history for lenders to appreciate in the future.