Last week you were checking out at your favorite store, and the cashier offered you a discount if you applied for their credit card. You said why not, and applied for it.
Did you know that they do a credit report inquiry every time you apply for a loan or credit card? These inquiries affect your credit score. It will depend on the type of inquiry the company does.
If you’re here it means that an inquiry was done on your credit, and you want to know everything about the types of inquiries and their effect on your credit score.
Want to learn the difference between a hard inquiry vs a soft inquiry?
Hard Inquiry vs Soft Inquiry: The Basics
Before we get into the details of the differences between a hard versus a soft credit check, we’ll tell you the basics about credit inquiries. What is a credit report?
A credit report is a report prepared by a credit bureau about your credit history. This information is used by lenders to determine your creditworthiness. In other words, it’s their way to know if you’ll be able to pay them back.
Some of the information your credit report includes is account information details such as balances, credit limits, past due and good standing accounts. These credit reports list the credit inquiries companies such as banking institutions have done.
These inquiries can affect your credit score. That’s why experts recommend you authorize a company to run a credit check when you’re certain they’re your best bet and, you actually need the service they’re providing.
The effect of these inquiries on your credit score will depend on the type of inquiry they do. The two types of inquiries are soft and hard credit checks.
What Is a Soft Credit Check?
So you are excited about the job you were just hired for, or you finally found the perfect apartment or house to rent. Here comes the least fun part of it, the mountain of paperwork that you must fill out, and read thoroughly because the devil is in the details. You want to make sure you aren’t signing away your life!
You don’t actually sign away your life in those documents, but you authorize the company or landlord to run a background check. Part of this check includes your credit report but in this case, it’s what’s known as a soft inquiry or soft pull. These are also run by lenders during the pre-approval process, and when you request your own copy of your credit report.
Soft pulls give a high-level review of your credit information and don’t affect your credit score. This type of checks can be done without your permission; just like that bank from the credit card offer, you received in the mail. The only soft inquiries that may appear on your credit report are the ones you requested yourself.
When these are listed on your credit report they aren’t listed in the same section as your hard inquiries. The good thing about them is that these soft pulls are a great way to stay on top of your credit.
This way you know what’s going on with your credit score, and see the progress if you’re trying to improve it. Experts say that a good rule of thumb is doing a soft pull of your credit report every quarter.
What Is a Hard Credit Check?
A hard inquiry is done when you apply for a credit card, mortgage or other types of loans. This type of credit check needs to be authorized by you. Usually, the authorization is included as part of the application.
Hard pulls provide the lender with your complete credit report. It includes all your personal information, credit history, public records, credit score, among other information, in other words, the whole enchilada.
You really have to pay attention to hard credit checks because these affect your credit score. Sometimes even applying for a cell phone contract or even cable contract can generate a hard pull. So always be mindful of the services you request, this is another reason why keeping an eye on your credit report is recommended.
When a hard inquiry is done you may lose anywhere from 1 to 5 points from your credit score. For some people, this isn’t a big thing but for others, it can mean that they’ll have to pay thousands of dollars on their mortgage.
Hard vs Soft Credit Check: Differences That Make a Difference
We’ve discussed each type of credit check, and we know they aren’t created the same. The main differences between them come down to the scope, authorization, and effect on your credit score. Yet, what most people don’t pay attention to is for how long these credit inquiries will stay on your credit report.
This might not seem like a big deal, but it actually is because 1 to 5 points can mean a better interest rate, and ultimately approval of your loan. This doesn’t apply to all credit scores because your FICO score doesn’t work the same way, and not all soft inquiries appear on your credit report.
Hard inquiries stay on your credit report for 2 years. Yet, it only impacts your FICO score for up to 12 months. Your FICO is calculated by using your overall credit history including recent credit activity, payment history, and type of credit you usually use, among other factors.
Another difference is that your FICO score ignores if you get several credit inquiries in a certain time frame. That means that the credit pulls will show on your credit report as 1 hard pull versus 8 or 11 hard hits on your credit.
Usually, this applies if the credit pulls were done in a 30-day time frame. This makes FICO a great tool to shop for rates when you’re looking for lending.
Wrapping It Up
Now that you know all there’s to know about a hard inquiry versus a soft inquiry, you’ll know how to protect yourself and be ready for when you need to apply for financing. Remember to focus on preventing hard inquiries as much as you can to maintain a healthy credit score, applying for lending when you actually need it and keeping tabs on your credit by doing a soft pull every quarter.
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