How do credit inquiries work?

If you are living in Canada, and you want a loan or a mortgage from a company/bank. Then you should know that a loan/mortgage is provided based on your credit report. All this process is officially said to be a credit inquiry. You too can check your credit score.

Indeed, read the article to get detailed information about credit inquiry and it’s working.

What is a credit score? It is a version of the statistical analysis of your credit report’s data. Mainly it is a 3-digit number that tells about the condition and situation of your credit report. What is a credit inquiry? Why is it needed? Continue reading.

What is a credit inquiry?

A credit inquiry is like an entry that appears on your credit report when some organization accesses your credit information. In other words, when you or any financial company/bank need your credit file or report. Then they request all the credit information from a credit bureau. We can also say that if you need a loan from a company, then the Canadian company will first check your credit report. Then that company approves your loan based on your credit information.

The credit inquiry is also divided into two subcategories, according to their nature. In inquiry, lenders check your credit report to know when and how frequently you Applied for a loan. A bad inquiry will also temporarily affect your credit score. Similarly, queries with good results are related to viewing credit reports. This inquiry request will positively affect your credit score

Let’s get to know the types: A hard inquiry occurs when a lender accesses your credit file to help decide whether to approve you for credit. A soft inquiry happens when you or someone else checks your credit unrelated to a specific credit application.

Hard inquiries

From the name, you can get that this type is a strict inquiry. A hard inquiry is often made by creditors when you want a loan from them. A hard inquiry can also appear if you request the creditors for a credit card. They want your credit report details for a background check, whether you need It and can pay it or not. So it helps the creditor to avoid any credit management risk.

When you apply for a loan then this is considered as a debt that can lower your credit score up to five points. But when you show progress to manage the debt effectively then it goes up. This type of inquiry remains for 2 years on your credit report.

If your credit report has many hard inquiries in a shorter time, then this will create a risk for the creditor. You can remove the hard inquiry with the help of Credit Repair companies.

Soft inquiries

When you want to know about your credit and request a credit inquiry. Then this inquiry is considered to be a soft inquiry. You can view the existing creditors, review the annual credit report, and can also preview the inquiries done by expected creditors. Monitoring credit or checking credit score will not affect the credit score.

Sometimes you get a free credit score on your credit card. All this is because of soft Inquiries made by the company. Similarly, utility companies and auto insurance companies in Canada also check credit through soft Inquiries.

Is considered good to check your credit report throughout the year. Why? Because you can view hard and soft Inquiries on your credit report.

How do credit inquiries work?

Credit reports have a summary of your credit history when you have a late payment, how much credit you have used and what is left. So credit inquiries will let you know about your credit information. But how does the credit inquiry work? The credit report has a detailed credit score and credit history. So when you request a loan/credit from a lender/creditor, they check your credit report.

After that, they will be able to provide you with a loan according to your credit report. That is how much and at which interest rate the loan should be provided to you. The credit report is requested by the credit bureau. Mainly there are 2 National Consumer Credit Bureaus of Canada, i.e. Equifax and TransUnion. So creditors request your credit information from these bureaus.

Purpose of credit inquiry

After accessing your credit report, the evaluation process starts. The creditors check your payment history and credit score. That tells about your position to pay back the debt. For example, if you have a higher 3-digit credit score, then there is a higher probability of paying back the debt in time. So creditors accept your loan proposal based on your credit report.

If you apply for credit or services, the creditor will be directed towards the credit check and the entry of hard credit inquiry will appear on your credit report. Other than loans, many companies can also check your credit report for marketing purposes. That is considered a soft inquiry like existing creditors checking credit reports or expected creditors sending you offers.

Credit card companies can also check your credit report history. Other than this, it is also advised to do credit inquiries regularly. Because it doesn’t affect your credit score but you can have an eye on your credit report.

How does credit inquiry affect your credit score?

In this era of inflation, everyone needs money. However, applying for credit in a row can reduce your credit score. That is not recommended for maintaining a good credit report. Multiple loan applications mean multiple hard inquiries by creditors on your credit report.

That will automatically lower the 3-digit credit score. As hard credit inquiries can affect your credit score, it’s better to avoid numerous loan requests at a time. Similarly applying for different credit cards at the same time also lowers the credit score.

How to manage hard credit inquiries?

So many hard inquiries on your credit report make the creditor worry about your financial status. To maintain a good credit report, it’s better to apply for credit when needed. The best example of managing hard inquiry is if you applied for a car loan or mortgage. Then avoid any other credit application for six months or a year. It’s recommended to apply for a loan when you need it. It will reflect a healthy credit score.

Monitor your credit report regularly from credit bureaus. It will let you recognize the hard inquiries on your credit report. Let’s suppose, there is a hard inquiry that you don’t recognize. Get the details of creditors from the report and contact them. Because there may be a chance of fraud or scams.

Final words

Credit inquiries are necessary for making a check and balance of your credit report and credit score. Because these inquiries allow you to monitor and manage the debts. Similarly, credit inquiries allow the creditors to check your capability of managing a new loan.

When you know the consequences of inquiries on credit reports, then you will easily manage a good credit score.  And the best version of the credit report that attracts creditors, whenever you apply for a loan.