Broadly speaking, a credit inquiry is a request by a financial institution or other company (like a potential landlord) for information about a consumer’s creditworthiness from a consumer reporting agency (CRA), which are commonly called credit bureaus. The big three credit bureaus are Equifax, Experian, and TransUnion. A fourth credit bureau currently making a push to join the big three is called Innovis. In addition, there are numerous smaller regional and specialized CRAs (such as consumer reporting agencies that specialize in employment background checks and other credit bureaus that specialize in tenant-screening).
Most often, credit inquiries are made by financial institutions like mortgage lenders and credit card issuers. There are two types of inquiries: “hard inquiries” and “soft inquiries.” As a note, TransUnion will call hard inquiries “regular inquiries.”
When a potential borrower — like an applicant for a credit card or mortgage — submits an application to a potential creditor (for example, American Express) the creditor makes a “hard inquiry” to one or more credit bureaus. When a hard inquiry is made to a credit bureau (say Experian), the creditor supplies Experian with certain personal information about the consumer. That information frequently, but does not always, include a Social Security number. In response to a hard inquiry, Experian generally sells a complete consumer report (a/k/a credit report) to the potential creditor. Most often, a consumer report sold in response to a hard inquiry includes the consumer’s credit score as well as substantial details about the consumer’s credit history.
It is important to understand that a hard inquiry remains on your credit report for two years and that a hard inquiry may have a negative impact on your credit score. When a consumer has a high number of hard inquiries in a relatively short time frame, the consumer is viewed — sometimes unfairly — as an individual that needs access to a lot of credit. Those individuals can be viewed as high credit risks. The result may be that an application for credit is denied or credit is offered at extremely high-interest rates.
Unlike hard inquiries, soft inquiries are not seen by potential creditors (they do not appear on consumer reports that a creditor receives when it makes a hard inquiry) and have no impact on a consumer’s credit score.
There are several types of soft inquiries. One type is the “promotional inquiry.” With a promotional inquiry, a credit card company or other lender may simply obtain lists of potential consumers who could be good candidates for credit offers. For example, a credit card issuer may request the names and addresses of all individuals within a certain zip code known to have a high median income so the credit card issuer can send out those “invitations to apply” or “pre-qualification” letters we all seem to receive on a regular basis.
Another type of soft inquiry called an “account review inquiry.” Account review inquiries are exactly what the name suggests. An existing creditor will obtain credit information about its consumer so it can make decisions about whether the consumer is or remains a good risk. Account review inquiries can result in credit line increases, credit line decreases, or offers of better or worse terms (higher or lower interest rates). Sometimes a creditor will call in a loan or cancel a credit card if an account review inquiry suggests to the creditor that the risk associated with extending credit to the consumer has become too high.
Finally, a soft inquiry occurs when an individual consumer obtains his or her own credit report from a credit bureau or another source or uses credit monitoring services. These personal checks on one’s own credit, like all soft inquiries, have no impact on a consumer’s credit score and are not included on consumer reports to potential creditors in response to hard inquiries.