A beginner's guide to credit inquiries

Credit inquiries play an important role for buyers and lenders alike, and they can make all the difference regardless of if you're a first-time homebuyer or an experienced property owner.

The key to a successful credit inquiry is understanding how they work and how they impact your credit score. Below are answers to some of the most common questions about credit inquiries and how you can help make your next inquiry a favorable one.

What is a credit inquiry and who can make one?

A credit inquiry is a formal request to see your credit report. Also known as a credit check, a credit inquiry is usually made by a financial institution such as a bank or credit card company. Employers, landlords and property managers can also check your credit. And you can inquire about your own credit as well.

The Fair Credit Reporting Act (FCRA) (PDF) outlines your rights pertaining to your credit report and who can make a credit inquiry. It prohibits accessing your credit report unless there is a "permissible purpose" such as processing your application for a loan or insurance, or with your consent. The FCRA also lists the actions you can take if your rights are violated.

When are credit inquiries needed?

Credit inquiries commonly take place when a person applies for a mortgage, loan or credit card. But they are used for other purposes as well. Here are a few situations that may involve a credit inquiry:

• A bank or lender makes an inquiry. If you apply for a mortgage, you can expect the lender to make a credit inquiry. Your credit score and other details can influence the approval process as well as the interest rate for your mortgage. Lenders also make inquiries to review your existing accounts.
• An employer inquiries about your credit. Many companies now require credit background checks for new employees. If you work in financial services or are applying for a government job, the odds of your employer making a credit inquiry are higher.
• You want to check your own credit. You'll need to make a credit inquiry if you want to get a copy of your credit report.
• A court order is issued. A federal grand jury subpoena or court order may require a credit inquiry. In these cases, your permission may not be required, and an inquiry can legally occur without your consent.

How does a credit inquiry work?

Most lenders have strict policies and procedures regarding credit reports and how they use the information gathered from a report. While procedures may vary, most banks and lenders take the following three steps when making a credit inquiry:

1. The lender notifies you in advance that a credit inquiry is required. They may ask your permission or consent to pull your credit report.
2. You may be asked to complete a form authorizing consent (PDF) for the lender's credit inquiry.
3. The lender contacts an established credit bureau such as Experian, TransUnion or Equifax to request your credit report.

What is the difference between a hard inquiry and a soft inquiry?

Credit inquiries are categorized as either hard or soft. A hard inquiry is typically requested by a third party, such as a lending institution or credit card issuer. It involves pulling your credit report from an established credit bureau such as Experian, TransUnion or Equifax. You can expect a hard inquiry if you apply for a home loan or credit card.

Requesting your own credit report is an example of a soft inquiry. Another example is a credit card company checking your credit to determine whether you meet their pre-approval qualifications. Unlike hard inquiries, which remain visible on your credit report for two years, you're the only one who can see soft inquiries.

Will a credit inquiry affect my credit score?

The answer depends on the inquiry type. A soft inquiry will not affect your credit score, but a hard inquiry may affect your credit score. While a hard inquiry remains on your credit report for up to two years, it typically no longer impacts your credit score after a year.

How to mask a hard inquiry from your credit report

A hard inquiry cannot be removed but can be masked from appearing on your credit report by converting it to a soft inquiry. Soft inquiries cannot be removed, and they remain visible on your own report, but lenders can't see them.

Unfortunately, there is no fast or easy way to mask a hard inquiry from your credit report. It takes time and there's no guarantee you'll succeed. Here are some things you can do to mask a hard inquiry:

1. Request a copy of your credit report. You can do this through your bank, or through annualcreditreport.com.
2. Check your hard inquiries for accuracy. Highlight any inquiries you don't recognize. Remember, some unauthorized hard inquiries may be legitimate.
3. Contact the organization(s) in question. Request they remove the unauthorized inquiry from your report.
4. Write a letter to the credit bureau. Report the unauthorized credit inquiry and request an investigation. List each unauthorized inquiry and attach a copy of your credit report with the questionable inquiries highlighted.

Before you go through the final steps, consider these two things: First, attempting to mask a hard inquiry from your report requires time and effort. Second, remember hard inquiries only remain on your report for about two years.

How does a credit inquiry impact your ability to get a mortgage?

A credit inquiry is a requirement for obtaining a mortgage. If your credit is in good shape, it can help you get a mortgage.

If your credit is average, you may not want a drop to impact your chances of being approved for a loan.

Will shopping for rates damage my credit?

Comparing lenders and their mortgage interest rates is a must if you want to secure the best rate possible. But some buyers are reluctant to shop around for rates because they fear it will impact their credit score.

However, credit checks from different mortgage lenders are treated as a single inquiry on your credit report as long as all the inquiries are made within the same 45-day window. This means five different lenders could pull your credit within a week or two of each other and the impact would be the same as one lender pulling your credit.

What is the key to a favorable credit inquiry?

Understanding the role of credit is important if you plan to buy a home. Share your concerns with your lender and remember your credit report is only one of many factors lenders consider when reviewing your mortgage application. When you're ready to apply for a mortgage, talk to a Home Lending Advisor about your options.