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Hard Inquiry vs. Soft Inquiry — What’s the Difference?

August 23, 2024 by James Scott

Knowing the difference between a hard inquiry vs soft inquiry can help you maintain a good credit score. Here’s what you need to know.

Most people know that your credit score can drop if you miss a payment or have a new collection filed against you. But how about when you apply for new credit? Yes, a credit application will trigger a “hard inquiry” on your report, which can have an impact on your credit score. Here’s what to know about hard inquiries, and how they compare with “soft inquiries.”

What is a Hard Inquiry?

Hard inquiries occur when you apply for credit and consent to allow a lender to check your credit report. These inquiries dated within the past 12 months count toward 10% of your credit scores even though 24-months of inquiry history is retained in your credit report.

Hard inquiries are listed by date and include the lender’s name and the name of the third-party credit provider that provided the report to the lender.

Examples of hard inquiries include:

  • Applying for a car loan and the dealer checks your credit report
  • Applying for a new credit card
  • Requesting to have the credit limit increased on an existing credit card
  • Applying for a mortgage
  • Applying to lease an apartment

Only authorized parties are allowed to access your credit report, and to do so, they must have a permissible purpose. Lenders only have permissible purpose if you have applied for credit and given the potential lender consent to check your credit report. Hard inquiries made for any other reason without your consent are not permissible and you have the right to dispute any unauthorized inquiries.

How Many Points Does a Hard Inquiry Affect Your Credit Score?

According to credit experts, “In most cases, a hard inquiry from a lender will decrease your scores by 7 points or less. The highest drop in scores that I’ve seen was 23 points, but that is very rare.”

The impact of applying for credit will differ from person to person based on their unique credit history. Individuals with very little or no credit history may see a bigger drop in scores compared to someone who has established credit and who has proven to manage more accounts over time.

It is true that in most cases, an occasional hard inquiry will have little to no impact on your credit scores. However, a new hard inquiry can lower your score by a few points when certain factors come together in your credit report:

  • Opening a new credit card or line of credit will affect your length of credit history because it lowers the average age of your total accounts. This, in turn, will lower your length of credit history and subsequently, will lower your credit scores.
  • New credit, once used, will increase the “amounts owed/credit utilization” factor of your credit scores and may also contribute to lowering your scores.

Minimize the Impact of a Hard Inquiry on Your Credit Score

To minimize the impact on your score, do your rate shopping within a focused amount of time. Most credit scores are not affected by multiple inquiries from the same type of creditor within a short period of time.

Credit score models have been programmed to accommodate typical “rate shopping periods” for auto, mortgage, or student loans. This means that if you are looking to buy a new automobile, conduct your comparison shopping among multiple dealers and creditors within a 30-day average period. Then, multiple hard credit inquiries from auto lenders will only count as a single hard inquiry for credit scoring purposes.

Hard inquiries count toward the calculation of your credit scores, so it’s important to monitor your inquiries. Make sure that you know who, when, and why a creditor has reviewed a copy of your credit report. If you notice hard inquiries in your credit report that you do not recognize, it’s important to find out more about them by using the information in your report and disputing the inquiries. You can learn more about how to dispute inaccuracies in your credit report by visiting the FTC’s website.

How to Check for Hard Inquiries

The next time you apply for new credit, you’d be wise to obtain and review your credit report. Or, get a free report at annualcreditreport.com, a federally-mandated website that gives you a free report from each of the three major credit bureaus. In your report, you’ll see a list of the creditors and lenders who have checked your credit file over the past 24 months. These credit checks by creditors and lenders are called “inquiries.”

But not all inquiries are created equal — hard inquiries and soft inquiries have different effects on your credit score.

What is a Soft Inquiry?

Soft inquiries are checks of your credit report that are not associated with your credit application. They do not impact your credit scores in any way.

Examples of soft inquiries might include any of the following:

  • Checking your credit report and credit scores through an organization authorized to provide credit reports to consumers
  • Applying for a job
  • Receiving prescreened offers of credit from credit card companies, insurers, and other creditors

Hard Inquiry vs. Soft Inquiry: Rule of Thumb

If you’re not applying for credit, you won’t incur a hard inquiry. So you don’t need to worry about dragging down your credit score by signing up for an app or service that helps you monitor your credit.

That being said, don’t be afraid to apply for credit if you need it. The impact on your score is typically small if you are not applying for many kinds of credit within a short time.

Filed Under: Credit Scoring Tagged With: Credit Score, Credit Tips, Hard Inquiry

Understanding Debt-to-Income Ratio: A Key Factor in Mortgage Approval

March 7, 2024 by James Scott

When it comes to securing a mortgage for your dream home, there’s a crucial number that can make or break your application: your debt-to-income ratio (DTI). Understanding and managing your DTI is essential for navigating the mortgage approval process smoothly. Let’s delve into what DTI is, why it matters, and how you can calculate it.

What is Debt-to-Income Ratio (DTI)?

Your debt-to-income ratio is a financial metric that compares your monthly debt payments to your gross monthly income. Lenders use DTI as a measure of your ability to manage your monthly payments and repay debts promptly. It helps them assess the level of risk involved in lending to you.

Why Does DTI Matter in Mortgage Approval?

Lenders consider your DTI alongside other financial factors when evaluating your mortgage application. A high DTI indicates that a significant portion of your income goes toward paying off debts, leaving you with less disposable income to cover mortgage payments. This can raise concerns about your ability to handle additional debt responsibly.

A low DTI, on the other hand, suggests that you have a healthier financial profile with more room in your budget to accommodate mortgage payments. Lenders typically prefer borrowers with lower DTI ratios, as they are perceived as less risky and more likely to make timely mortgage payments.

How to Calculate Your DTI:

Calculating your DTI involves two simple steps:

Add Up Your Monthly Debt Payments: This includes payments for items such as credit cards, student loans, car loans, personal loans, and any other outstanding debts.

Calculate Your Gross Monthly Income: This includes all sources of income before taxes and other deductions.

Once you have these figures, divide your total monthly debt payments by your gross monthly income, then multiply the result by 100 to get your DTI percentage.

Understanding the Numbers:

Ideal DTI: In general, lenders prefer DTI ratios below 43%. However, some lenders may accept higher ratios depending on other factors such as credit score, employment history, and savings.

Front-End vs. Back-End DTI: Front-end DTI only considers housing-related expenses (mortgage, property taxes, homeowner’s insurance, etc.), while back-end DTI includes all debts.

Impact on Mortgage Approval: A lower DTI increases your chances of mortgage approval and may even help you qualify for better interest rates and loan terms.

Tips for Improving Your DTI:

Reduce Debt: Pay off outstanding debts or consider consolidating them to lower your monthly payments.

Increase Income: Look for opportunities to boost your income through a salary raise, side hustles, or additional sources of revenue.

Avoid Taking on New Debt: Refrain from applying for new credit cards or loans before applying for a mortgage, as it can increase your DTI and affect your eligibility.

Your debt-to-income ratio plays a pivotal role in determining your eligibility for a mortgage. By understanding how DTI works and taking steps to manage it effectively, you can improve your chances of securing a mortgage with favorable terms. Remember, a lower DTI not only strengthens your mortgage application but also reflects a sound financial foundation for homeownership. Take control of your finances today to pave the way for your future home sweet home.

Filed Under: Credit Scoring Tagged With: Credit Score, Debt to Income, Real Estate

Considering a New Home Next Year? Start Now and Get a Jump on Improving Your Credit Score

November 1, 2022 by James Scott

Considering a New Home Next Year? Start Now and Get a Jump on Improving Your Credit ScoreWith the new year right around the corner, that leaves you with precious little time to get your finances in order. Let’s explore a few tips that will help you get a jump on improving your credit score before the end of the year.

Grab A Fresh Copy

The first step is to order a fresh copy of your credit report from one of the major agencies. The Fair Credit Reporting Act allows you to access a free copy of your credit report once every 12 months. So, if you have not ordered a copy recently, it is time to do so. You can access this free service through AnnualCreditReport.com, which is a website recommended by the Federal Trade Commission.

Clean Up Anything Outstanding

Now that you have a copy of your credit report, it’s time to go through it, line-by-line. You should recognize every current and outstanding account in the report. Any balances owing should be in order and reflect how much you owe. It’s critical that you flag any mistakes or old debts that you have already paid in full. If you come across anything that shouldn’t be on your credit report, call the reporting agency to let them know. If necessary, they will assist you with challenging the issue.

Pay Down Those High-Interest Debts

The final tip is to prioritize your outstanding debts so that you can pay them off more efficiently. The essential debt payments are your mandatory minimums, which you need to pay to avoid being sent to a collection agency. From there, try to pay off your debts with the highest interest rates first. Getting these paid off faster means that over time, you’re spending less on interest payments. Moreover, you can use that extra cash to pay your debts down further.

The above are just a few of the action steps that you can take today to start improving your credit score. When you’re ready to discuss a mortgage for your new home, give our team a call. We will be happy to advise you on the mortgage offer that suits your needs, budget, and credit.

Filed Under: Credit Scoring Tagged With: Credit, Credit Score, Mortgage Applications

A Complete Guide: What Is A Credit Freeze And Why Is This Helpful?

September 8, 2021 by James Scott

A Complete Guide: What Is A Credit Freeze And Why Is This Helpful?Due to recent changes in federal regulations, consumers are now allowed to freeze their credit free of charge. Prior to changes in these regulations, credit bureaus would charge consumers for freezing their credit. What does this mean, and why might someone want to do this?

Freezing Credit Restricts Access To Confidential Information

There are certain situations where consumers may need to have access to their credit reports. For example, they may be applying for a home loan or a car loan. There are other situations where consumers may not need access to their credit reports for an extended amount of time. In this case, it is possible to freeze the credit report to restrict all access. This makes it harder for hackers to access confidential credit information, preventing them from opening an account in someone else’s name.

Who Can Freeze Their Credit Reports?

All consumers have the ability to freeze their credit reports. Even some children may have a credit history, so it is possible for parents to freeze the profile of a child for a certain amount of time. This prevents hackers from stealing credit information regarding children as well. 

How Can Consumers Freeze Their Credit Reports?

It is relatively easy to conduct a credit freeze at any of the three major credit bureaus including Equifax, Experian, and Trans Union. All consumers need to do is request a credit freeze via a phone call,  letter, or an online request. The bureau has to comply, freezing someone’s credit report within one business day. Furthermore, consumers should be able to access free fraud alert services as well. That way, individuals will automatically be alerted if someone tries to open an account in their name. 

What Happens When Applying For A Loan?

If applying for a loan, consumers need to unfreeze their credit reports. Therefore, they should file a request with all three major credit bureaus. They will have to comply within one hour. Then, after the lender has the information he or she requires, consumers can simply request a credit freeze again. That way, they limit the opportunities of hackers who might be trying to steal confidential information and commit identity theft. 

 

Filed Under: Credit Scoring Tagged With: Credit Safety, Freezing Credit, Real Estate Tips

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