Hard Credit Inquiries and Soft Credit Inquiries: Difference, Effect, and Advice
When calculating your credit score, the three credit bureaus consider everything. The length of your credit history, total amounts owed, credit utilization ratio – all play a significant part in determining your credit score. Most of the factors affecting your score are in your full control, but some – such as credit inquiries – are not. Credit inquiries are an essential process that could help you get better terms on your insurance plan, lower interest on your credit cards, and they can even help you get a better apartment. But, depending on the type of inquiry, they could also negatively affect your score. So, what are the credit inquiry types, and what are the differences between them? Let’s take a look.
Whenever someone looks into your credit report for insights or review, it’s known as a credit inquiry. You’re performing a credit inquiry every time you access your own report, and so is your employer when they’re doing a background check on you. Third-party companies that have a legal right to it can easily request credit inquiries from Experian, Equifax, or TransUnion and gain insight into the past seven to ten years of your credit history. Credit reporting agencies must report each inquiry made, so you can always see who’s accessed your information.
The inquiries can impact your FICO score, which considers five major categories – payment history, amounts owed, length of your credit history, credit mix, and new credit. Inquiries are counted towards new credit, which accounts for 10% of your FICO. Many new inquiries could be seen as many new credits, so your FICO score could be lowered. However, not all inquiries are seen as the same, and not all of them will impact your score the same way. That’s why they’re divided into two major categories – soft credit inquiries and hard credit inquiries.
What Is Soft Credit Inquiry?
When someone performs a soft credit inquiry, they don’t need to ask for your permission or authorization. As long as the person/company has a legal right to gain insight into your report, they can do it. Soft inquiries, known as soft credit pulls and soft credit checks, do not impact your credit score since they’re not necessarily linked to a new line of credit. They’re performed to gain insight into your financial stability and previous credit history for a variety of reasons.
You can perform a soft inquiry to gain insight into your credit score. Many employers conduct a soft inquiry as an essential part of your background check. Your creditors and lenders typically make soft inquiries on a monthly basis to gain insight into your accounts and see whether you’re still in good standing.
Credit card issuers can make a soft inquiry to determine your demographics and eligibility for their financial products so that they can send you prequalified loan offers. You can make use of these soft inquiries to get a glimpse into the interest rates and terms you can expect with a certain loan or credit card. However, keep in mind that this is just an estimation. Only once a lender performs a hard inquiry can they tell you the exact loan terms. Additionally, even if you prequalify for a loan, that doesn’t necessarily mean that your application will be accepted.
A hard inquiry, also known as a hard pull or a hard credit check, can only be performed with your authorization. Companies will make a hard credit inquiry when you’re applying for a new loan or line of credit, and it will show on your credit report and could impact your credit score, reducing it by up to five points. How many points you’ll lose, if any, depends on your overall credit profile and it will vary from person to person. It will depend on two things primarily. One, the current standing of your credit accounts. Two, on the number of recent hard inquiries you’ve made.
You can expect a hard inquiry every time you apply for a new type of loan. That includes mortgages, student loans, new credit cards, auto loans, requests for credit limit increases, apartment rentals, new utility applications, and more. Since hard inquiries could potentially lower your FICO score, it’s best to avoid making several loan applications within a short period, especially if you’re between fair and good or good and excellent scores. Losing just a few points can put you in the lower credit range, which diminishes your chances of being approved for new lines of credit and could result in higher fees and interest rates, costing you real money down the line.
How to Tell Whether You’ll Have a Hard or Soft Credit Inquiry
In most instances, it’s relatively easy finding out whether a company or an organization will pull a soft or a hard credit check. After all, hard inquiries cannot be performed without your authorization. However, it’s still important to be careful and double-check. Some companies will request your permission for a hard credit inquiry within the fine print of your agreement with them, making it easy to overlook. While a single hard pull typically won’t cause significant damage to your score, it’s risky if you’re looking to make a more significant purchase such as a new home. If you’re not certain whether a company will make a hard or a soft inquiry, you can always ask and make sure.
As mentioned, the impact of a hard credit pull on your score can vary. Your score could drop immediately by five points, or it could be completely unaffected. What’s important to understand here is that individual hard checks don’t have a specific value. So, even though they impact 10% of your FICO score and only 5% of your VantageScore, they’re not quite as important as your credit utilization ratio or payment history, for example.
So, instead of credit bureaus giving specific values to a single hard inquiry and determining precisely how each individual credit pull will impact your score, they look into your total number of inquiries over a period of time. The more time there is between different hard credit inquiries, the lesser their impact on your score will be.
Checking Your Credit Score and Report is Easy
As a general rule of thumb, a hard inquiry will stay on your report for 24 months. According to the Fair Credit Reporting Act (FCRA), each inquiry must remain on your credit report for at least 12 months. Inquiries made by your employers need to stay for at least two years.
However, just because it stays on your report so long doesn’t mean that it impacts your score during that entire time frame. The effect of a hard credit pull lessens over time. Your VantageScore will go back to normal within three to four months, while your FICO score will be unaffected after 12 months. That’s why it’s advisable to avoid making any new loan applications quickly, one after another. Waiting for at least three to six months between applications will reduce their impact on your score.
Although it may seem illogical for hard inquiries to lower your credit score, it’s quite an important aspect of our credit score system. Your credit score essentially shows your creditworthiness and tells the lenders how likely you’ll be to default on your payments.
The lower your credit score, the more fiscally irresponsible you’ll appear, and the more likely you’ll be to skip your payments – at least that’s how it seems on paper. Lower credit scores are also signs of financial trouble, and so are many new loan applications – they could be a sign that you’re in desperate need of money, and lenders will generally consider this as high-risk borrowing. That’s why multiple hard inquiries will impact your score more severely than a single credit pull. Since those with no credit history haven’t yet proven their creditworthiness with their scores, a single hard credit pull could affect their scores more severely.
Avoiding Hard Credit Inquiries
Fortunately, there’s a way to avoid having multiple hard inquiries on your credit report. Lenders and creditors know when you’re doing rate shopping, and they’ll treat these hard inquiries differently than others. Rate shopping involves applying for the same type of loan with several different lenders. For example, if you’re looking for a home loan, you might want to apply with a few lenders and see which one will offer you the best terms. Banks view this as a sign of financial responsibility, and creditors and lenders appreciate it. So, your FICO and VantageScore won’t be as affected when you’re rate shopping and making several hard inquiries within a short timeframe. However, keep in mind that the short timeframe is short.
VantageScore will consider all hard credit inquiries made within a 14-day period as a single inquiry. Whether you’re applying for student loans, car loans, home loans, or anything in between – the type of application is insignificant. FICO provides you with a 45-day “safe harbor”. Same type loan applications (such as student, car, and home loans) will be treated as a single hard credit inquiry if they’re made within 45 days. Some older FICO scoring models have a 14-day “safe harbor”, however. So, it’s best to group your loan applications together and make hard inquiries within 14 days to stay on the safe side.
It’s essential that you regularly check your credit reports and examine them thoroughly. Each credit bureau allows you to check your reports for free once a year. If you see any unfamiliar hard inquiries, it’s in your best interest to dispute them and notify the credit union. It might be a sign of identity theft or fraud. Since your authorization is necessary for a hard credit check, unfamiliar inquiries could mean someone attempted to take out a loan in your name. Don’t ignore the hard inquiries you haven’t authorized, and contact the credit union immediately.
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Both hard and soft credit inquiries are essential in your daily life. Lenders and creditors use them to assess your creditworthiness, your employers use them during your background check, landlords rely on them before giving you the keys to your new apartment. While hard credit inquiries could impact your score, as long as you’re responsible with your loan applications, you shouldn’t be severely affected. Go rate shopping within a 14-day period, avoid making multiple applications when you’re not rate shopping, and examine your credit reports thoroughly every time you receive them.