Hard vs. Soft Credit Inquiries
Point of Interest
While you shouldn’t be scared of hard credit inquiries, you will want to limit excessive hard pulls, if at all possible.
Credit scores are numerical ratings of how likely you are to default on a loan payment. While you need to know what your credit score is, the real intended users of the scores are lenders. Banks, credit unions and private lenders use your credit score to decide if they are willing to offer you financing, how much they’ll let you borrow and at what the interest rate.
As your score is tracked by third-party companies, lenders have to reach out to get your score when they need it. This is known as a credit check, credit pull, or credit inquiry. This could happen when you’re looking to get a mortgage, buy a new car, apply for a credit card, rent an apartment, apply for a job or sign up for insurance.
What is a hard credit inquiry?
If you’ve heard people talking about credit checks that could hurt your credit score, they were talking about hard credit inquiries. Hard credit inquires happen when a company pulls your credit score and credit report to make a lending decision. Some of the more common instances of hard credit pull include applications for mortgages, car loans, personal loans, student loans, or credit cards.
As these scores signal to the credit reporting bureaus that you’re looking to borrow money, it may affect your score. A single hard inquiry will probably not affect your score. However, if you have several hard inquiries coming in, you may see a temporary drop in your score.
Why could it drop your score? Think of it this way. Your credit score shows how risky a borrower you are. If you are constantly asking a bunch of different companies to borrow money, there may be an underlying reason as to why that could be a red flag. While this might not seem fair, lenders will always err on the side of caution when choosing who to lend money to.
What is a soft credit check?
The second type of credit inquiry that can be made is a soft credit check. No matter how many soft pulls you have, it should not affect your credit score. Typically, these inquires are done as pre-authorizations or when you check your score through a third-party company. For example, if you’re getting pre-qualified for a credit card, pre-qualified for an insurance quote or applying for a job that requires a credit and background check, chances are it’s going to be a soft credit check.
There are some instances where a soft credit check will pre-date a hard inquiry. For example, when applying for a credit card, you may be able to get “instant approval” online in seconds. This approval most likely comes through a soft inquiry. However, the credit card company may go back and initiate a hard credit pull before giving final approval on your account.
Keeping up with your credit score
While credit scores are designed for lenders to use, they are equally important to individuals — if not more. Why? Your credit score is the key to getting approval for car loans, mortgages, and other buying opportunities. Additionally, some higher-profile jobs might deny you employment if they see issues with your credit.
The credit reporting process is not perfect. From time to time, mistakes are made on reports that can affect someone’s score. You must regularly check your report and dispute any errors or incorrect information you may find.
Currently, there are three national credit reporting bureaus that lenders utilize the most when making lending and approval decisions — Equifax, Experian, and TransUnion. Your scores with each bureau should be similar, but it’s important to check all three just in case there is an error. You never know which company your lender will use to pull your score.
Unfortunately, Equifax became one of the most well-known credit reporting bureaus after a major data breach in September of 2017 that affected over 147 million people. In the wake of this, the company is launching EFX2020, where the company pledges to set the standard for security while exceeding customer expectations. So far, the company has replaced four top leadership roles, including the CEO and CTO, and made several other internal changes.
The company also offers credit-monitoring programs for $19.95 for individuals and families. These programs include access to scores from all three bureaus, social security scanning, and credit report monitoring. Currently, the individual plan and family plans are available for the same price.
The second national credit reporting bureau is Experian. The company has been around for over 125 years offering various credit products to individuals, companies, financial institutions, and lenders. Experian has 7,000 employees in the U.S. and maintains data on 220+ million U.S. consumers.
The company utilizes FICO scores and has recently released a few products to help consumers raise their credit scores instantly. Experian’s Boost allows consumers to connect their bank account to their credit report and get credit for many more on-time payments and positive borrowing traits that may not be included.
TransUnion not only provides credit reporting information, but the company also has quite a few resources for those looking to learn more about their credit. Those looking for free identity protection can get it directly through the company. Service is completely free and unlimited.
For an upgraded charge of $24.95 a month, TransUnion customers can get unlimited score reports, access to CreditCompass to get assistance in cleaning up their score, and up to $1,000,000 in identity theft insurance.