Friday, December 16, 2016

How Long Do Credit Inquiries Stay on Your Credit Report? Experts Divulge

If you’ve applied for a small business loan, taken out a mortgage, or signed up for a business credit card, then you’ve heard the pesky term “credit check” before.

A credit check—or credit inquiry—helps lenders and financial entities decide whether they’ll lend money to you or your business. And in almost all cases, undergoing a credit inquiry is a necessary step to getting approval for your rental home, business loan, credit card, and so on.

But those credit checks aren’t just a one-and-done kind of thing—credit inquiries stay on your credit report even after you’ve secured approval for your credit application.

Just how long do credit inquiries stay on your credit report? Here’s what you need to know.

How Long Do Credit Inquiries Stay on Your Credit Report?

Your quick answer is this: Credit inquiries stay on your credit report for a maximum of 2 years—but they’ll only impact your FICO credit score for a maximum of 12 months.

But the answer is a little more complicated than that. To fully get into it, we first need to cover the different types of credit inquiries.

Soft Credit Pulls

In the world of credit checks, there are soft credit pulls and hard credit pulls.

As the name suggests, a soft credit check isn’t as big of a deal. In fact, when a lender or financial institution performs a soft check on your credit, it has no impact on your credit score.

Soft credit pulls happen pretty often. Some credit card issuers perform soft pulls when you apply for a credit card. Or, an employer might even perform a soft credit check before hiring you for a job. And any time you check your own credit score, that’s a soft credit pull.

Because soft credit pulls don’t affect your credit score, you don’t have to worry about them staying on your credit report.

Hard Credit Pulls

Hard credit pulls, on the other hand, are what we want to pay attention to when we’re thinking about how long credit inquiries stay on your credit report.

A hard credit check is done for the same reason as a soft credit check—lenders or banks want to review your creditworthiness to see if lending to you is a good idea. But hard credit inquiries are usually done when you’re seriously applying for credit—like taking out a personal loan, a business loan, or a line of credit.

How Do Hard Credit Inquiries Affect Your Credit Score?

When you let a bank or lender do a hard credit check on your credit report, what does that mean for that all-important, three-digit number—a.k.a your credit score?

Well, when a lender hard pulls your credit, your credit score will take a small hit regardless of whether you’ve been approved or declined. According to FICO, credit inquiries tend to correlate with higher risk borrowers—and your credit score will reflect that correlation.

But don’t worry—credit inquiries don’t impact your credit score that much.

It all comes down to how FICO calculates your credit score. In the grand scheme of things, credit inquiries make up a small fraction of your credit score. When you break down your credit score meaning, you’ll find that a majority of your credit score depends on your payment history and credit utilization. Your length of credit history, mix of credit, and new credit—where credit inquiries show up on your credit report—are not as important factors in your score.

So, if there’s a credit inquiry that’s on your credit report, don’t panic—it doesn’t have a huge impact on your credit score. According to Tina Hay, CEO of Napkin Finance, “A hard credit pull can take off several points from your credit score, but it’s typically a 1 to 5 point impact.”

But there are a few intricacies that you should know about when it comes to credit inquiries and your credit report.

All Credit Inquiries Are Not Created Equal

While credit inquiries only stay on your credit report for a maximum of 2 years—impacting your score for no more than 12 months—you should know that the FICO algorithm considers different credit inquiries in different ways. According to Hay, “Different people’s scores will be affected differently by a hard pull—some may not lose any points, while others may lose several for a single new inquiry.”

It all comes down to what your credit history is and the circumstances of your credit inquiry. Hay says that, “FICO considers the following factors: the purpose of the inquiry, the number of hard inquiries on your account, the number of recent inquiries, the time elapsed since your last credit inquiry, and so on.”

You see, the effect a credit inquiry has on your credit score isn’t black and white. It really depends on how FICO regards your credit inquiry.

For instance, say you’ve been shopping around to find the best rate on a business loan, auto loan, or student loan. Odds are, you’ve undergone a couple of hard credit pulls in order to lay out all your offers on the table. The FICO algorithm is designed to ignore multiple credit inquiries made within a certain time frame—usually 30 days prior to credit scoring. If you’ve contacted 4 different lenders all with the same purpose, your credit report would only indicate one credit inquiry.

The FICO algorithm will also weigh how strongly credit inquiries affect your credit score by looking at your overall credit history. If you only have a few accounts or a short credit history, multiple credit inquiries will hurt your score more than they would a strong credit profile.

These examples just go to show that the FICO algorithm isn’t cut-and-dry when it comes to credit inquiries. And before you panic about how long credit inquiries stay on your credit report, you should think through whether those credit inquiries are even impacting your score.

The Bottom Line on How Long Credit Inquiries Stay on Your Credit Report

In the worst case, a hard credit inquiry will affect your credit report for 12 months. But the inquiry’s impact—if it even has one—will mostly affect your score for 6 months after the pull occurred.

So unless you’re planning on getting a new mortgage or a large amount of business financing in the next 6 to 12 months, you have no real need to worry about your credit inquiries if you have a strong credit rating in the first place.

Your best bet is to wait out the credit inquiry and practice good borrowing habits to keep your credit score strong in the meantime. Hay reminds us that, “The better your credit history is, the less of an impact a new inquiry should have.” So make sure to keep up your borrowing best practices while you wait out a credit inquiry. 

And don’t worry, small business owner, that credit inquiry will be completely erased from your credit report in 2 years at a maximum!

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