How Many Credit Inquiries Is Too Many?
Learn how credit inquiries work and what you can do to minimize their impact on your credit score.
Author: Eduardo Sanchez
April 25, 2023|Blog
Have you ever received promotional mail from credit card companies or giant retailers? They usually offer a great intro of zero interest for 12 to 15 months or money back on a purchase if you sign up using their credit card. If you’re looking to make a considerable purchase, sometimes the offer may be worth it. But before you begin kicking off every card application offer that comes your way, there’s something else to consider: when you apply for a loan or credit, lenders will typically check your credit history with what’s known as a hard inquiry… and each hard inquiry can cause a temporary dip in your credit score.
Credit inquiries are a normal part of the credit application process, but too many inquiries can have a negative impact on your credit score. In this post, we’ll discuss how credit inquiries work, how many inquiries are too many, and what you can do to minimize their impact on your credit score.
What is a Credit Inquiry?
A credit inquiry is a record of a request by a lender or authorized party to access your credit report. There are two types of inquiries: hard inquiries and soft inquiries.
A hard inquiry occurs when you formally apply for credit, whether it's a new credit card, an auto loan, or a mortgage. Sometimes even applying for a new cell-phone carrier or utilities could result in a hard inquiry on your credit report. This is because by applying for these services, you’re giving permission for the creditor to check your credit history with one of the three major credit bureaus. The information on your credit report is then used to determine whether or not to approve your application, and to set the terms and interest rates on your loan or other services. It’s important to remember that a hard inquiry can cause a temporary drop in your credit score, but by being mindful of when and how often you apply for credit, you can still maintain a healthy credit score.
A soft inquiry, on the other hand, occurs when you check your own credit report, or when a lender checks your credit report for marketing purposes. For example, a large furniture retailer may send you a promotional offer on their credit card with a great intro rate by opening an account with them. Because a soft inquiry isn’t a determining factor in whether a creditor actually lends you money, it has no impact on your credit score. However, if and when you fill out the application with the lender for that prequalified card, a hard inquiry may then be added to your report. Hint: applying for the Arro Card never results in a hard inquiry on your credit report.
How Do Hard Inquiries Impact Your Credit Score?
When you apply for credit with a lender, it’s important to keep in mind that the resulting hard inquiry can have a slight impact on your credit score. Typically, one hard inquiry will cause only a drop of fewer than five points on your FICO Score, and within a few months, your score will usually bounce back once you demonstrate the ability to manage the new debt responsibly. However, it’s worth noting that individuals with a short credit history or few accounts may experience a greater impact on their credit score.
While hard inquiries only account for 10% of your FICO Score, they do stay on your credit report for two years. Fortunately, your FICO Score only considers hard inquiries from the last 12 months, so the impact on your credit score will decrease over time.
How Many Hard Credit Inquiries Is Too Many?
There’s no hard and fast rule for too many credit inquiries, as the impact of your inquiries on your credit score depends on various factors, such as the type of credit you’re applying for, the length of your credit history, and your overall credit utilization.
That said, as a general guideline, you should aim to limit hard inquiries to no more than one or two per year. Trying to avoid applying for a lot of credit lines within a short time frame results in a red flag to lenders because it can suggest that you’d be a higher credit risk.
It’s worth noting that some types of credit inquiries are exempt from this guideline, such as those related to mortgage or auto loan applications. When you apply for a mortgage or auto loan, multiple inquiries within a certain period of time (usually 14-15 days) are treated as a single inquiry, as long as they’re for the same type of credit.
If you’re looking to open multiple lines of credit, it may be better to pace yourself, so you can demonstrate your ability to handle each form of debt before acquiring a new one. Otherwise, lenders may identify you as a high-risk borrower. Waiting to apply can also give your credit score a chance to rebound from the last inquiry, in addition to an additional boost from on-time payments that will look good to lenders, resulting in better offers.
3 Ways to Minimize the Impact of Credit Inquiries on Your Credit Score
If you’re worried about the impact of credit inquiries on your credit score, there are a few steps you can take to minimize their impact:
Be selective about when you apply for credit: Only apply for credit when you really need it, and try to limit your applications to one or two per year.
Shop around for the best rates: If you're applying for an auto loan or credit card, do your research and look at pre-qualified offers as a guideline for what rates you get out before beginning the formal application process.
Monitor your credit report: Regularly check your credit report for errors or fraudulent activity. Arro members get unlimited access to an easy-to-use credit check tool right in the Arro app. Arro cardholders can view their credit score frequently, staying well informed of progress.
How to Reduce the Impact of Hard inquiries on Your Credit Score
Usually, hard inquiries won’t significantly lower your credit score in the long run, especially if you have a positive credit history. Typically, they lead to a temporary decrease but bounce back within a few months.
Improving your credit score is one of the best ways to cushion the blow of hard inquiries. You can do this by focusing on the following areas:
Always make on-time payments on all your accounts.
Aim for a credit utilization ratio below 30%. The lower the better.
Settle any outstanding accounts, including collections or charge-offs.
Don’t close any accounts, especially ones that have been opened for several years.
The Bottom Line When It Comes to Credit Inquiries
When it comes time to fill out a loan or credit card application, the lender will conduct a hard credit inquiry to determine your creditworthiness. There’s no way around that, plain and simple. However, by strengthening your credit score you can reduce the impact it may have on you. This begins with checking your credit score and understanding what’s on your credit report.
The next step is determining what offer best suits your financial situation and whether the lender already has made a soft pull. This helps build a guideline for you to follow and will reduce the number of hard inquiries you might incur through multiple loan applications.
Arro does not do a hard inquiry during the application process, so your credit never gets hit when applying for the Arro Card.