When people apply for a loan or a credit card, lenders check the potential borrower’s credit to determine whether they’ll be a trustworthy borrower or a risky borrower. This is called a credit check. It’s also commonly known as a credit hit, credit pull, or credit inquiry, and it involves a lender looking at your credit history. Credit checks fall into two categories–a hard inquiry and a soft inquiry. A hard inquiry is a credit check by lenders when you apply for credit such as a loan or a credit card. These inquiries impact your credit score because most credit scoring models look at how recently and how often you apply for credit. A soft inquiry is a review of your credit file, which includes existing accounts, pre-screening inquiries by potential lenders, and your requests for a free annual credit report, which you can access here: https://www.annualcreditreport.com/index.action. These credit checks do not change your credit score. Let’s look at both hard inquiries and soft inquiries in more detail.
What is a soft inquiry?
A soft credit inquiry is a review of your credit that can be made even if you didn’t apply for credit. For example, credit companies may perform a soft inquiry on your credit to help them market their products. Credit services also use soft inquiries in what is known as a pre-approval to help borrowers find a loan. These pre-approvals require information about a borrower, including their Social Security number, and allow companies and lenders to do soft inquiries and pre-qualification offers. Some lenders will also provide a borrower with price quotes on a loan through a soft inquiry request; this is meant to help a borrower better understand the terms of a potential loan. Also, if you ever check your credit score through a credit service or credit card company, they receive your score through a soft inquiry.
How do soft inquiries affect credit scores?
Soft credit inquiries do not affect credit scores. Soft inquiries are not tied to an actual loan or exchange of money. That means there is no impact on your credit score when a soft inquiry is performed.
When are soft credit inquiries used?
There are a variety of reasons soft credit inquiries are done. These include:
- Checking your credit score
- Pre-qualified insurance quotes
- Pre-qualified credit card offers
- Employment verification and/or background checks
- Some personal loan applications (in these cases, a soft inquiry is used until your application is approved; once you decide to proceed with the loan, a hard inquiry is then performed)
An important thing to know is that some types of credit checks could appear on your credit history as either a hard or soft inquiry. This includes cable, utility, cell phone, and internet providers checking your credit. If you want to know what type of inquiry will be performed, contact the company, credit card issuer, or financial institution to find out whether these credit checks are hard or soft.
What is a hard inquiry?
A hard credit inquiry is done by lenders when you apply for credit, usually using your Social Security number. A hard credit check most often occurs when a lender or credit card issuer checks your credit when deciding whether to provide a loan. The most common hard inquiries happen when you apply for a mortgage, loan, or credit card. When a hard credit inquiry needs to be done by a lender or credit service, they will let you, the borrower, know when it will occur. By submitting the application, you are giving the lender permission to perform a hard credit inquiry if and when it’s needed.
How do hard inquiries affect credit scores?
Unlike soft credit checks, hard inquiries can affect your credit score. A hard credit pull usually drops your credit score by a few points. While having your credit score lowered is never a good thing, a single hard inquiry probably won’t have much of an impact on whether you get approved for a new loan or a credit card. However, if there are several hard credit inquiries performed in a short period of time, lenders may see that as a higher risk when deciding whether to provide a loan. Why? Because multiple credit applications in a short amount of time can give lenders the impression that the borrower is not in great financial shape. A borrower seeking many different forms of credit may also give lenders the idea that a borrower could pile up multiple sources of debt.
How long do hard inquiries last on credit reports?
Hard inquiries can stay on your credit report for up to two years. But the impact on your credit score (usually just a few points) often disappears before the credit inquiry drops off your credit reports.
Tips for minimizing impact to credit score
We mentioned earlier that multiple hard credit inquiries within a short time frame can have a negative effect not only on your credit score but also on your overall ability to take out a loan. Again, that’s because lenders may view these inquiries as an attempt to receive multiple lines of credit–and that raises the possibility of piling up multiple sources of debt. This can make a borrower appear to be a higher risk, which can lower the likelihood of being approved for a loan or credit card.
There are a couple of ways you can reduce the negative impact on your credit score:
- Try not to apply for several credit cards within a short period of time. Once every six months should be the most often you apply for a credit card.
- Only apply for credit cards that you really need or would benefit from having. Some credit cards offer cash-back rewards or other benefits that may be useful. If you don’t need the credit card or it won’t help you, don’t apply because it will negatively affect your credit score.
- if a loan is needed, apply for one with a soft credit hit. You can then decide upon approval to take out that loan, at which time a hard inquiry will be placed on your credit. Until that hard inquiry happens, your credit will not take a negative hit.
It’s important to keep these tips in mind. But you should also know that having multiple hard inquiries in your credit history, especially when looking to buy a car or a home, won’t necessarily stop you from getting a good interest rate on your loan. That’s because FICO (one brand of credit score) gives borrowers a 30-day grace period before some loan inquiries–such as a mortgage or auto loan–show up in your FICO credit score. Plus, instead of counting them separately, FICO may count multiple mortgage inquiries or car loan inquiries as only one inquiry if they’re made within a certain period of time–usually around 14 days. This can help your credit score because there won’t be as many hard inquiries that can bring your score down.
When are hard inquiries used?
A hard credit inquiry is used when you’re looking to make a financial commitment through a loan application or a credit card application. These instances may include:
- Student loan applications
- Credit card applications
- Mortgage applications
- Auto loan applications
- Personal loan applications
- Apartment rental applications
Any of these applications may result in a hard credit inquiry. But that’s not necessarily a bad thing. One or two hard credit pulls may temporarily lower your credit score by a few points, but that usually is not enough to damage your overall credit.
How does a soft inquiry differ from a hard inquiry?
Soft credit inquiries and hard credit inquiries sound similar, and both offer a look into your credit. But they have different purposes and different impacts on your credit score. Here are the differences:
|Soft Credit Inquiries||Hard Credit Inquiries|
|Occur when your credit is checked for informational purposes or to provide pre-approved credit offers||Occur when your credit is checked for lending decisions after you apply for a form of credit|
|Do not affect your credit score||Affect your credit score|
|Do not require your permission||Require your permission as part of the application process|
|Are on your credit report for up to two years but are not visible to potential lenders||Are on your credit report for two years and are visible to creditors|
Be informed when you apply for a loan
If you’re concerned about your credit score and want to know how it’s being affected by credit inquiries, the best thing you can do is ask questions and understand what types of credit pulls will occur when you apply for a loan. While hard credit inquiries do temporarily impact your credit score, they are a part of the loan process when it comes to applications for a mortgage, auto loan, student loan, credit cards, and other loans. As long as you keep these applications to a minimum, these hard inquiries shouldn’t hurt your ability to receive a loan at a lower interest rate–assuming the rest of your credit history is solid, of course.
Hopefully, the information in this article provides you with the knowledge to better understand what credit inquiries are, how they affect your credit score, why lenders perform hard and soft credit checks, and what to look out for when applying for a loan. If you’re ever unsure about what type of credit inquiry a lender may use when you apply for a loan, don’t hesitate to ask. It’s your credit history, and you have the right to know if it’s being impacted.
If you have any questions about loans or the application process, or if you’re ready to take out a personal installment loan, contact the loan experts at Sun Loan. We’re happy to answer any questions you have and provide you with a loan that offers affordable monthly payments and an opportunity to build your credit through on-time payments. Apply online, visit us at one of our branches, or call us at (800) SUN-LOAN.