Hard vs. Soft Credit Inquiries: Difference and Importance
Your credit score is one of the most important aspects of your financial life; it represents your financial well-being. There are two ways to find out your credit score – a soft pull and a hard pull. However, each is different and has different results on your financial health.
You should know inquiries have about 10% impact on your FICO score, but it sounds nominal. Doesn’t it? Well, sometimes a ding in your credit report can pull you out of excellent credit score range down into the good credit score range. This will result in a higher interest rate or APR, costing you hundreds or even thousands of dollars. Therefore, you must have a good knowledge of credit inquiries and why they matter. There are two types of credit inquiry – soft inquiry and hard inquiry.
A hard inquiry, also known as a hard pull, occurs when a lender checks your credit when making a lending decision once you apply for a mortgage, auto loan, personal loan, line of credit, credit card, etc.
A hard inquiry takes place only if you authorize the lender to pull the report and is recorded on your credit report. It stays on your credit report for 2 years, but won’t affect your credit score after 12 months. Multiple hard inquiries in a short span could lower your credit score by a few points, and the effect may be negligible on your credit score though. You must be wondering why. When credit scoring models detect multiple inquiries on your credit report, it indicates you are likely to have more debts to manage. That could lead lenders to consider you as a higher-risk customer.
Then how to shop around for the lowest rate?
Most credit scoring models know about this phenomenon and take it into account when recording your credit pulls. How? When you compare rates for the same financial product, say a personal loan or a credit card, if multiple lenders of the same product check your credit score within 45-day window, inquiries for your credit score will be counted as a single inquiry, instead of multiple inquiries, by most newer credit scoring models. That way, your credit score doesn’t suffer each time you get a rate from personal loan lenders or credit card issuers.
Can we avoid hard inquiries?
Well, you can minimize hard inquiries. Know your credit score range and other eligibility criteria. Don’t apply for credit, like mortgage or credit card, you don’t qualify for. It is not only a hard inquiry but rejection as well. Apply for credits you can qualify for. There are other ways to know the range of your credit score and eligibility without hurting your credit score. You can get a free credit score from your current lender.
Always shop around for mortgage or credit card rates within a short amount of time, 45-day window. It won’t minimize your hard inquiries but will minimize the impact of hard inquiries.
A soft inquiry, also known as soft pull, occurs when someone or a company checks your credit score outside your knowledge. Soft inquiries won’t affect your credit score and may or may not be recorded in your credit report. Soft inquiry happens when credit card companies, loan lenders or insurance companies pull your credit to see if you qualify for certain offers. If you get a new job, your employer may also have a soft inquiry before hiring you.
Typically, it is you who can see soft inquiries on your credit report, but, sometimes, entities like insurance companies can see inquiries requested by other insurance company and your lenders may also see inquiries made by debt settlement companies.
Examples of soft and hard pulls
The difference between soft and hard inquiries is when you give the permission for an inquiry, it boils down to a hard inquiry and a soft inquiry happens when someone checks your credit without your permission or knowledge. Let’s have a look at examples of soft and hard inquiries.
Common hard inquiries
- New credit card application
- Personal loan application
- Education loan application
- Mortgage application
- Line of credit application
- Auto loan application
Common soft inquiries
- Pre-qualified credit card offers
- Pre-qualified personal loan offers
- Pre-qualified insurance offer
- Employment verification (background check by an employer)
You should check your credit report often to ensure if there is a hard inquiry without your permission. If you find a hard inquiry that happened without your permission, you should dispute it with the credit bureau immediately.