How does a hard credit inquiry affect a borrower's credit score?

A hard credit inquiry occurs when a lender checks a borrower's credit report as part of the decision-making process for a loan, credit card, or mortgage application. This type of inquiry may cause a temporary decrease in the borrower's credit score, typically by a few points. The rationale behind this is that multiple inquiries can indicate a higher risk to lenders, as it may suggest that the borrower is experiencing financial difficulties or is desperate for credit.

While the impact is usually minimal and short-lived—often recovering within a few months—it's still important for borrowers to be mindful of how many credit inquiries they make in a short period. This is particularly relevant when applying for new credit.

In contrast, the other options do not accurately reflect the effect of a hard credit inquiry. It does not have a lasting impact on a credit score, nor does it improve the score significantly. Therefore, understanding the nature of hard credit inquiries and their temporary effect on credit scores is crucial for borrowers managing their credit health.