Credit inquiries: Overview, definition, and example
What are credit inquiries?
Credit inquiries refer to the requests made by lenders, businesses, or other parties to check an individual’s or business’s credit report to assess their creditworthiness. Credit inquiries are made when someone applies for credit, such as a loan, credit card, or mortgage, or when a company checks the credit of a customer for purposes like approving a rental application or extending payment terms. There are two types of credit inquiries: hard inquiries and soft inquiries.
- Hard inquiries occur when a lender or creditor evaluates your credit report as part of a lending decision. These can impact your credit score.
- Soft inquiries happen when a credit check is done for informational purposes or without the intention of lending. These do not affect your credit score.
Why are credit inquiries important?
Credit inquiries are important because they provide valuable information to lenders and other parties about your financial history and creditworthiness. Lenders use these inquiries to help decide whether to approve a loan, credit card application, or mortgage. Multiple hard inquiries within a short period may signal to lenders that an individual is seeking credit from various sources, which can potentially lower their credit score.
For consumers, understanding credit inquiries is important to protect their credit score and avoid unnecessary hits to their credit report. For businesses, making credit inquiries helps in assessing risk when deciding whether to extend credit or enter into financial agreements with customers or clients.
Understanding credit inquiries through an example
Imagine an individual, Sarah, applies for a car loan at her local bank. The bank makes a hard inquiry to check her credit report, assessing her credit score, outstanding debts, and payment history. This inquiry helps the bank determine whether Sarah is a good candidate for the loan. If Sarah applies for several loans or credit cards within a short time, each application may result in a hard inquiry, which could slightly lower her credit score.
On the other hand, Sarah might check her own credit report or a business might conduct a soft inquiry to evaluate her eligibility for a service. This type of inquiry would not impact her credit score.
Example of credit inquiry clause
Here’s how a credit inquiry clause might look in a loan agreement or credit application:
“The Borrower agrees that the Lender may make credit inquiries to assess the Borrower’s creditworthiness as part of the loan approval process. The Borrower acknowledges that a hard inquiry will be made on their credit report and may impact their credit score.”
Conclusion
Credit inquiries are checks made on an individual’s or business’s credit report to assess their creditworthiness and financial history. These inquiries are essential for lenders and businesses to make informed decisions about extending credit. It’s important for individuals to be aware of credit inquiries and understand the difference between hard and soft inquiries, as multiple hard inquiries can affect credit scores. For businesses, credit inquiries help mitigate the risk involved in financial transactions and ensure that the terms of credit are appropriate for the customer’s financial situation.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.