Credit Reports: Hard vs. Soft Credit Inquiries
In the US, there are three credit bureaus that maintain credit reports. These three companies – Experian
, and TransUnion
have arrangements with most financial institutions. The financial institutions report to the bureaus the status of their consumer debts. These three credit bureaus collect all this data and create reports on individuals. They sell these credit reports to other companies that plan to issue credit or loans.
You may be aware that when you apply for credit, the potential creditor pulls your credit history and scores. But you may not know that those credit checks could affect your credit score. Here’s help understanding the difference between hard and soft credit checks and why it matters.
Credit inquiries, or pulls, come in two varieties: “hard inquiries” and “soft inquiries."
Hard inquiries, as well as soft inquiries, refer to a specific kind of credit report check offered by the bureaus.
In general, the big difference is that hard pulls are where you’ve granted permission. They indicate that you’re actively seeking credit. The inquiry shows up on your credit report for everyone to see, and they tend to have a slightly negative impact on your credit scores.
Soft inquiries also known as a “Quotation searches” are credit checks that are usually ordered by the potential buyer when checking his or her own credit report. The soft inquiry cannot affect the credit scores. You are not the only entity able to perform a soft inquiry. Credit card, mortgage companies or insurance companies might check in on your credit and lending risk through soft inquiries.
This is an inquiry that occurs when a person or company checks your credit report as a background check. Looking for key pieces of information to check an individual’s creditworthiness. Before carrying out the full exam of a credit report, a soft pull is helpful. The soft pull enables these companies to assess whether the individual will be successful in applying.
The bureaus make a record of a soft credit check, however, it is only visible to you.
You can verify your credit report as often as you want without having a negative impact on your credit score. Some examples of soft credit inquiries are:
- Credit score and credit reports you request for yourself.
- Routine credit checks by your credit card company before sending you pre-approved promotional offers
- Potential employers may do background checks or one might be required for a security clearance.
- Identity verification when opening a new bank account, insurance companies or potential landlords may look at your credit report to assess risk.
Hard pulls are made when a financial institution is making a lending decision. These occur when you give a lender permission to check your credit history. This is done with the intent to obtain a mortgage, student loan, credit card, personal loan, or an auto loan.
The hard inquiries can create a negative effect on your credit scores. Credit bureaus link each hard inquiry to a new loan or credit card request. This changes the amount of overall debt and risk if the consumer receives credit approval from the inquiry. Lenders view multiple hard inquiries as an indication that the borrower wants to borrow money from multiple sources. This results in an increased financial risk. It is common if a consumer shops around for a home mortgage or a different type of loan. The credit bureaus say that they view all hard inquiries made within a 14 to 45 days as a “shopping period & count as a single inquiry.
The impact of hard inquiries is minimal compared to other credit factors that make up your score; representing just 10% of your credit score.
Knowing the difference between soft and hard inquiries can help you make a better decision when asked. A small glitch on your credit profile could prevent you from getting a mortgage or opening a bank account. Therefore make sure that you understand if it is a soft or a hard inquiry.