Hard vs. Soft Credit Inquiries Explained
Have you recently given a business permission to run a credit inquiry? Unsure of what a credit inquiry actually is? It sounds important because it is, and you want to make sure you choose the correct type of credit inquiry to maximize any kind of benefit.
A credit inquiry, also known as a “credit pull” occurs when a business obtains permission to review your credit history. There are two types of credit inquiries: a “soft inquiry” and a “hard inquiry.” These credit inquiries require a third party to take a look at the involved credit report, and there is potential for your credit score to be affected depending on which type of credit pull you choose. The two credit inquiries differ considerably when considering their ability to change a current credit score.
Soft Credit Inquiries
Soft credit checks have no affect on your credit score, and they may even occur without your permission (no need to worry because credit score is not altered). These types of credit pulls occur for a variety of reasons; for instance, soft credit checks may happen when a business generates a request to review your credit, without you submitting a new application for credit through them. For example, LendingTree pulls a soft credit check to prequalify applicants for mortgages. Two examples of soft inquiries are:
- When you receive a credit card offer from a lender; the lender found you to be eligible through a soft inquiry
- When you request your own credit report from a bureau; you can do this once a year free of charge from each of the three major credit bureaus (Experian, TransUnion, and Equifax)
Aside from checking with a credit bureau or requesting a credit pull from a business, there are multiple other ways for a soft credit check to occur. Employer background checks may issue soft credit pulls and pre-approval for a credit card may require a soft credit check. While these inquiries do not affect credit score, they may have an impact on certain decisions made by companies or other systems that an application is sent to. This means that soft credit inquiries can still affect the involved individual despite the lack of sway on credit score!
Hard Credit Inquiries
Hard credit inquiries have a negative effect on your credit score, but they require permission of the involved individual before such an action is carried out. Hard inquiry reports typically remain on a credit report for two years maximum. These types of credit inquiries occur when a business needs to analyze a lending decision; relevant examples include applications for auto loans, student loans, mortgages, rental situations, or credit cards. Two examples of hard inquiries are:
- When a lender checks your credit in the student loan application process
- When a landlord checks your credit before approving your application
A hard inquiry isn’t too bad for your credit health, however, it may have small temporary effects, which namely involves several point deductions from your credit score. There are a few guidelines when it comes to applying for hard credit pulls. Whenever hard credit pulls occur without consent, checking the credit report details aids in any decision for dispute (these reports can be disputed by the way). A key reminder: hard credit pulls can only be disputed if they occur without applicant permission. Since hard credit pulls have the potential to deduct points from a credit score, it is generally advisable to limit the number of hard credit inquires to less than three a year. Many hard credit pulls within short periods of time can cause large negative deductions on a credit score because these actions indicate a desperate push for certain credit limits.
In general, a hard inquiry will take less than 5 points off of a credit score, but with a short credit history and large number of inquires, there is a much greater risk of reducing your credit score significantly. Despite these factors, a hard inquiry is a essential part of consumer loan applications since hard credit inquiries are necessary for all borrowers aiming to obtain financial products.
While your credit may need a tiny band-aid in the short term when applying for loans and corresponding credit inquiries, all financial products can improve your credit score over time. Understanding how credit inquires and their subdivisions operate is essential to successfully obtaining relevant requests such as loans or mortgages. With this newfound understanding, credit inquiries have less of a chance of causing negative consequences instead of the intended positive consequences.