What is the difference between an inquiry on a credit report generated by the individual versus by a lender, and which one has a negative impact on the score?

The difference between an inquiry on a credit report generated by an individual versus by a lender is significant, particularly concerning their impact on your credit score. These inquiries, often called "credit inquiries" or "credit pulls," serve different purposes and have distinct effects on your credit health. It's crucial to understand this difference to manage your credit effectively.

An inquiry generated by an individual is known as a "soft inquiry" or a "soft pull." This type of inquiry occurs when you, as an individual, check your own credit report or when a business checks your credit for reasons that don't involve an application for new credit. Soft inquiries are typically used for background checks, such as when you're applying for a job, when a landlord does a check for a rental application, or when you check your own credit report through annualcreditreport.com or other credit monitoring services. Soft inquiries are also generated by some financial institutions to pre-qualify you for offers, such as a pre-qualified credit card. These soft inquiries are recorded on your credit report, but they are generally not visible to lenders and do not affect your credit score. For example, if you use a service that monitors your credit score or if you view your credit report from any of the credit bureaus, that action will generate a soft inquiry. These have no negative impact on your score.

On the other hand, an inquiry generated by a lender is known as a "hard inquiry" or a "hard pull." This type of inquiry occurs when you apply for a new credit product, such as a credit card, a loan, or a mortgage. When you apply for credit, lenders need to review your credit report to assess your creditworthiness and determine the terms of the credit product they offer. This hard inquiry is recorded on your credit report, and it is visible to other lenders. Hard inquiries can impact your credit score, usually causing a slight and temporary dip. The degree of impact can vary based on your overall credit history and other factors but they generally have a negative impact, especially multiple inquiries in a short period. For instance, if you apply for three credit cards and a car loan within a month, you will have four hard inquiries which can all have a slightly negative impact on your score, and each inquiry lowers it.

The primary difference between soft and hard inquiries lies in their impact on your credit score. Soft inquiries do not affect your credit score because they are not seen as indications of a desire for new credit. They are seen as either you checking your own credit or an administrative check by an institution that does not have an intent to lend money to you. Hard inquiries, however, do impact your score, as each hard inquiry is considered a request for new credit, and multiple hard inquiries may indicate that you are a higher risk borrower. While a single hard inquiry might have a small negative effect, multiple hard inquiries within a short period suggest that you may be taking on too much debt, which increases your risk to lenders. Because lenders see these hard inquiries, the system sees it as a sign you are actively applying for more credit.

For example, if you are shopping for a mortgage, you may get several hard inquiries when you apply for mortgages at multiple lenders. Credit scoring models are programmed to understand and recognize that people will shop around for mortgages, so the system will not penalize you for multiple inquiries within a relatively short period of time, typically about two weeks. The credit scoring system will consolidate them together into a single "shopping" event, and you will not be negatively impacted for applying to multiple mortgage lenders at the same time. On the other hand, if you apply for five credit cards at different lenders within the same two weeks, the system may see that as a much greater risk than multiple mortgage inquiries.

In summary, the key difference is that soft inquiries are for informational purposes or background checks and do not impact your credit score, while hard inquiries are associated with credit applications and can slightly lower your score. Understanding this difference helps you manage your credit wisely by being careful about when you apply for new credit and by checking your credit report regularly for errors and inaccurate information.