How is an inquiry on the credit report different from checking credit score?

Question

I was reading on some posts on Money.SE about how inquiring on the credit report is not good because it lowers your credit score. It seems to me however that whenever you have a credit card that allows you to check your credit score for free, its not like you're actually lowering your score. So I was just wondering, what kinds of activities would trigger a credit inquiry?

Answer 1

There are two types of inquiries when checking your credit score: soft and hard inquiries.

Soft inquiries usually do not affect your credit score. They can be triggered without your permission. Examples of soft inquiries are:

1. When you check your own credit score
2. When an employer checks your background/credit
3. When you get pre-approved for a credit card
4. Renting a car

Hard inquiries on the other hand affect your credit score. These are most likely triggered with your consent. They affect your credit score because if you trigger many hard inquiries; this is seen as being desperate for credit. Examples of hard inquiries are:

1. Getting a loan from your bank.
2. Applying for a credit card
3. Applying for a mortgage

Answer 2

The purpose of a score is to give potential creditors some quantitative idea of a borrower's creditworthiness. It is a distillation of the credit file into a single number. Creditors, however, are not limited to seeing your score, nor are they obligated to base their decision on the score. They frequently do, but they may also consider other information present in your file, such as whether you have any accounts in collections.

That said, when a creditor makes an inquiry into your credit, be it the score or your actual file, the credit bureau takes into account the nature of this inquiry: is it for informational purposes only, or is the inquiry for the purposes of making a decision on whether to extend credit? This is the broad distinction between a "soft" inquiry and a "hard" inquiry. The former generally does not affect the score, but the latter almost always does.

Hard inquiries are always reported in the file from the bureau that was requested. Soft inquiries are usually reported (repeated inquiries such as those generated by a credit monitoring service on behalf of the borrower might be collapsed together). A hard inquiry will only appear on those files that were requested, so for example, if you apply for a credit card and the creditor requests your TransUnion file, their inquiry will appear on that file only. However, if your application is approved, the resulting account will (or at least, should!) appear on all of your files.

Soft inquiries may be generated periodically from various creditors without your consent, for marketing purposes (this is sometimes how you get those "pre-approved" offers). Any inquiry generated without your consent should not be detrimental to your score. As a corollary, any hard inquiry must be done with your consent.

The general principle is that an inquiry that is going to result in a formal decision to extend credit, should be reflected in the scoring model, because it is an indication of a need to borrow something.

For the reasons described at the beginning of my response, I personally believe that the emphasis on score is misguided, and that borrowers should focus on the integrity of their entire file. A single hard pull is not a big deal. Many hard pulls in a short period of time...that will look suspicious on your file even if the impact to your score is low, and those inquiries will stay on your file for about 2 years, regardless of approval. Don't micromanage your score, only to lose the gestalt of your files.