Why do hard pulls on your credit make it go down?


Why do hard pulls on your credit make it go down?

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This is because hard inquiries are typically coupled with or a sign of an application for new credit. This can be a new credit card, new installment loan (auto loan, personal loan, etc) or something else.

As a person submits more applications for new lines of credit, they are viewed as a riskier borrower by lenders and credit scoring companies, thus dropping your credit score.

A hard pull means you are trying to get more credit from someone. Think of it this way, someone looking for a new source of credit might be doing so because they’re unable to manage their existing credit payments (and a new source of credit can buy them a little more time to potentially solve the problem). Enough people do this before defaulting that the bureaus include it as a factor because of the potential.

A credit score is just a fancy way of measuring default risk, nearly everything that lowers it means that that factor is associated with more people with that characteristic defaulting than without it.

The difference between a soft pull and a hard pull of your credit score is that a hard pull can be used to issue credit. So the company doing a hard pull is essentially telling the credit agency that they have the intention to issue credit to you and that the paperwork on this should be filed in a few days. The credit agency therefore have to assume that the credit will be issued and lower the credit score immediatly. If they did not do this then you could potentially go around signing up for multiple lines of credit while your credit score was good before the paperwork have been sent to the credit agency.

First thing to understand about credit scores is that they are for the banks, and not you.

Hard pulls have no meaning to you, but to the banks they suggest you are looking for more credit. As noted in other comments, that might mean you are planning to take on more credit but have not yet. That leads to a risk that cannot be defined yet, hence a lowered score. Basically the lowered score is temporary and discourages you from continuing to look. Effectively this acts as a mechanism to forcefully control your ability to shop around, or to obtain lots of credit quickly. Both situations the banks dislike.

Overall it is best to think of credit scores with significant skepticism. An ideal borrower (aka someone who does not need to borrow) can have very low credit scores of they have chosen to avoid credit in the past. Additionally, someone drowning in debt can have a very good credit score. Someone who is “good at borrowing” gets a good credit score. That is a major part of why so many people have significant debt these days.

A hard pull strongly correlates with taking on new debt that hasn’t yet shown up on your credit report. New debt means you’re at higher risk of not being able to pay off even more debt.

As an example… I bought a new car on Friday. The dealership ran my credit Thursday in order to see what loans were available to me. I can see the hard pull on my credit report/score already. But it’ll take a few weeks for the loan to get set up, for the account to start getting reported to the credit bureaus (likely not until I make my first payment in May).

So if I were to go apply for a mortgage this week, I am higher risk on account of that new car loan. It’s harder to juggle a new mortgage and a new car loan. But the car loan and its balance don’t yet show up on my credit report. The hard pull is the best means of saying “this customer may have pending new accounts or may also be looking to take on additional debt.”