Hard Inquiry

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21 Aug, 2024

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What Is Hard Inquiry?

A hard inquiry is a request to check an individual's credit report. Lenders, banks, and financial institutions conduct queries when an individual applies for a loan. The lender disburses funds only if the loan applicant passes the inquiry.

When a query is conducted, the loan applicant’s credit ratings fall. But, within a year, the rating recovers automatically. If a borrower checks their FICO score, it is called a soft inquiry. The Fair Credit Reporting Act (FCRA) was passed in 1970. FCRA restricts unauthorized parties from accessing borrowers’ credit reports.

What is Hard Inquiry?

A hard inquiry is an in-depth check of a borrower's credit report. It ascertains borrowers' ability to pay off loans. It is undertaken when a borrower applies for a new loan.
A single credit query stays on the report for two years. But stops affecting the score after twelve months. This is known as a hard pull.
Lenders must get written consent from loan applicants before conducting a credit query.
In case of any discrepancy, a loan applicant can file a hard inquiry dispute with a credit bureau. Credit bureaus investigate complaints and remove unauthorized queries.

Hard Inquiry Explained

A hard inquiry is conducted on loan applicants before disbursing funds. Every lender, bank, and financial institution reviews a borrower’s creditworthiness. The credit query predominantly focuses on loan applicants’ credit history and credit scores.

It is important to note that the Fair Credit Report Act (FCRA) 1970 prohibits lenders from determining creditworthiness independently. Under FCRA, creditworthiness is reviewed by credit reporting agencies. Credit reporting agencies accumulate consumer data and sell it to a third party (lender). Only FCRA-approved credit agencies can conduct background checks.

Credit query requires consumer information like their addresses, employment details, sources of income, payment history, previous loans, current debts, etc. Every person leaves a paper trail and digital footprint—transaction history, credit score, debt, and other crucial details. This information is highly private and confidential. Therefore, the FCRA protects loan applicants.

The lender or credit reporting agency cannot simply conduct a background check on anyone. The lender requires written consent from the borrower to initiate a credit inquiry. The loan applicant loses a few points off their credit score whenever a credit query is made. But, this fall in the rating is temporary; within a year, the borrower's ratings recover.

Most banks and lenders rely on a single credit bureau. TransUnion, Equifax, and Experian are popular choices. Thus, the borrowers' report shows only one hard inquiry.

But the process varies for mortgages; for one mortgage applicant, all three-credit bureaus submit reports. Borrowers must plan before applying for a loan. They must check their credit scores before applying. All credit queries made within 45 days are considered a single query. Failing credit queries is a bad idea. Applying for a loan is not recommended if the credit ratings are low.

How To Dispute?

Let us discuss how to dispute hard inquiries.

The borrower must check their credit history regularly. They must double-check if the query is legitimate. Borrowers must track queries to identify unauthorized queries. Most hard inquiry disputes arise due to borrowers’ ignorance. Disputes can be avoided if a borrower is updated with their current credit ratings.

If borrowers identify an illegal query, they must alert the credit bureau. Borrowers must track hard inquiries, requests viewed by others, and regular queries. If a user identifies a credit query without applying for a loan, they can get the illegitimate inquiry removed.

If a borrower suspects fraud, they must take prompt action—no third party is supposed to have access to borrower information without prior permission. In such instances, borrowers must file a hard inquiry removal letter. In addition, the borrower can report the unauthorized party to the Federal Trade Commission. In extreme cases, borrowers might need to file a police complaint.

The credit bureau follows up on all hard inquiry dispute letters. The credit bureau investigates the complaint and rectifies incorrect information if any.

Examples

Now, let us look at some hard inquiry examples.

Example #1

Saul wants to buy a home and starts looking for a home loan. Saul has a good credit history and good credit scores. As Saul applies for a loan, the bank initiates a query and shaves 5 points from his credit rating. Before carrying out background checks, the bank receives written consent from Saul. This occurs due to the nature of the particular credit query. The fall in rating recovers automatically within a year. Saul passes all the background checks, and the loan is approved. Hereafter, credit rating depends on Saul’s discipline. If he repays on time, he might even improve his credit rating.

Example #2

Ruth is Saul's wife; she applies for a credit card. Again, the bank gets written consent from Ruth to run a credit check. Just like Saul, Ruth loses a few points from her credit scores. It is important to note that particular credit query is conducted only for big purchases like a house, credit card, car, education, or personal loan.

Hard Inquiry vs Soft Inquiry

Let us look at the hardands soft inquiry comparison to distinguish between the two.

Lenders conduct a hard inquiry before disbursing funds to a borrower. In contrast, soft inquiries are conducted for pre-approved loans—credit cards.
The former affects loan applicants' credit scores. The latter does not affect borrowers’ credit ratings.
The former requires written consent from the loan applicant. Permission is not required for the latter. Lenders, banks, and financial institutions only conduct the formers. In contrast, the borrower checking their credit score is a soft inquiry.

Frequently Asked Questions (FAQs)

1. How long does a hard inquiry last?

The usual period is two years, including the entire credit report. Banks and financial institutions conduct specific queries to ascertain loan applicants’ creditworthiness.

2. Does hard inquiry affect credit score?

Yes, credit queries affect credit scores. It decreases a borrower's credit score for a year. However, it depends on the borrower's profile. Loan defaults and irregular repayments reduce credit ratings considerably.

3. Does a hard inquiry go away?

Whenever a borrower applies for new credit, a credit query is initiated. It stays on the borrower's credit report for two years. It represents different elements for different borrowers. Other factors influence the drop in ratings. A history of delayed repayments or defaults will exacerbate the fall in credit scores.