Why does applying for a credit card affect your credit score?
When you apply for a credit card, the card issuer reviews your credit history. This puts what's called a "hard credit inquiry" on your credit file. Hard inquiries affect the new credit category that makes up 10% of your FICO® Score.
New credit matters because there's a correlation between your number of credit applications and your risk of defaulting on debts. FICO has found that consumers with at least six hard inquiries on their credit reports are up to eight times as likely to declare bankruptcy as consumers with zero inquiries.
A credit inquiry is a request for information on a consumer's credit file. There are two types: hard inquiries and soft inquiries, also known as hard and soft credit checks.
Hard inquiries
A hard credit inquiry is triggered by a credit application. Examples include credit cards, mortgages, auto loans, and personal loans. There are also other situations, including applying to rent an apartment and requesting a credit limit increase, that can sometimes trigger a hard credit inquiry. You must give your permission for any party to perform a hard inquiry.
This type of inquiry affects your credit score. It's not a large impact -- for most consumers, fewer than five points. However, multiple inquiries can bring your credit score down more.
Hard inquiries stay on your credit file for two years, but only affect your FICO® Score for one year.
Soft inquiries
A soft credit inquiry doesn't affect your credit score. This type of inquiry doesn't provide as much information as a hard inquiry, and creditors don't need your permission to perform a soft inquiry.
While there are many potential reasons for a soft inquiry, here are some examples:
- You use a prequalification tool to see what kind of credit cards or loan rates you qualify for.
- You pull up your credit score with a free credit score service.
- A potential employer checks your credit.
- A credit card company checks your credit in order to send you a preapproved credit card offer.
LEARN MORE: What's the Difference Between Hard and Soft Credit Checks?
For more information, watch the video below.