Posted by Abundant Wealth Planning LLC

What You Need to Know About Hard & Soft Credit Inquiries

What You Need to Know About Hard & Soft Credit Inquiries

When lenders check your creditworthiness with a hard inquiry (also known as a "hard pull"), they usually write official reviews on your credit reports. They use this information to assess how you have managed your credit in the past, how often you have paid your debts and bills on time, and whether you have derogatory remarks on your credit reports.

Also, they want to know how much credit you've managed and how long you've been managing your credit. These factors help creditors decide whether to grant a new loan or extend additional credit.

You can prepare for a strong credit pull by monitoring your credit reports and ensuring there are no nasty surprises. Checking your credit reports usually involves a soft credit inquiry or soft pull.

Let's take a closer look at the differences between hard credit inquiries and soft credit inquiries.

What is a Hard Inquiry?

Hard inquiries (also known as "hard credit checks" or "hard pulls") often occur when a financial institution, such as a credit card issuer, checks your credit when making a loan decision. They usually occur when applying for a mortgage, loan, or credit card and must be authorized.

A hard credit check may lower the score by a few points or have a negligible effect on the score. A single hard inquiry is not likely to play a significant role in the approval of a new loan or card. And the deterioration in your credit score often decreases or disappears even before the query permanently deletes your credit reports (hard credit checks usually stay on your credit reports for about two years).

That doesn't sound bad, but you might think twice about applying for multiple credit cards at once or even in a few months. Multiple Hard Inquiries in a short period can cause creditors and credit card issuers to consider you a high-risk customer, as they suggest you may have cash shortages or are preparing to rack up a lot of debt. It is best to spread out your credit card applications.

How many hard inquiries are considered too many?

The consequence of a hard inquiry on your credit score ultimately depends on the overall health of your credit. In general, adding a hard query or two to your credit reports can lower your score by a few points, but it's not likely to have a huge impact.

However, having a lot of hard credit checks in a short period of time is likely to have a bigger impact on your scores. Indeed, lenders (and credit scoring models) see more credit applications over a short time as a sign of risk. Although there may be exceptions when researching certain types of loans, such as car loans, student loans, or mortgages.

What is a Soft Inquiry?

Soft inquiries (also called "soft pulls" or "soft credit checks") often occur when a company or person checks your credit report as part of a background check. This can happen, for instance, when a credit card issuer checks your credit without your knowledge to see if you qualify for specific credit card offers. Your employer may also do some preliminary research before hiring you.

Unlike hard credit checks, soft inquiries will not affect your credit score. Depending on your credit bureau, this may or may not show up on your credit reports. Since soft inquiries aren't related to a particular new credit application, they're only visible when you check your credit reports.

Will checking my credit score lead to a hard inquiry?

No. This is reported as a regular credit check, so it won't lower your score. You can check your credit score with two major credit bureaus, Equifax and TransUnion, and it won't affect your credit score.

Examples of hard and soft credit inquiries

The difference between a soft and hard inquiry is that you gave the creditor permission to check your credit. If so, it may be reported as a hard inquiry. If not, it should be reported as a soft inquiry.

Let's look at examples of when a soft or hard inquiry can be included in credit reports. Note: This list is not comprehensive and should be considered a general guide.

Common Difficult Inquiries

  • Apartment rental applications

  • Car loan applications

  • Credit card applications

  • Mortgage applications

  • Personal loan applications

  • Student loan applications

Common Soft Inquiries

  • "Pre-qualified" credit card offers.

  • "Pre-qualified" insurance quotes.

  • Checking your credit score online

  • Employment verification (e.g., background check)

Note that other types of credit checks may appear as hard or soft inquiries. For example, utility, cable, Internet, and cell phone providers often check your credit.

If you are unsure how a particular application will be classified, ask the company, credit card issuer, or financial institution involved to distinguish between hard and soft credit applications.

How to Dispute Hard Credit Inquiries

We recommend that you check your credit reports frequently. If you find an error, such as a thorough investigation conducted without your permission, consider disputing it with the credit department. You can also contact the Office of Consumer Financial Protection or the CFPB for assistance.

According to Experian, one of the top three credit bureaus, this could be a sign of identity theft. At the very least, you'll want to investigate and find out what's happening.

Note that you can only dispute hard inquiries that arise without your permission. If you have authorized a full consultation, it usually takes two years to file your credit reports.

How to reduce the effect of hard credit inquiries

When buying a house or a car, don't let fear racking up multiple hard inquiries stop you from buying the lowest interest rates.

FICO offers a 30-day grace period before certain loan inquiries, such as mortgages or cars, are reflected in the FICO® credit score. And FICO can log multiple queries for the same type of loan (again, like a mortgage and a car) in a single query, as long as they're completed within a certain amount of time. This window is usually around 14 days.

While some lenders may rely on scoring models that give you more time to shop around without receiving additional guidance, you may want to keep 14 days for comparison shopping as you are unlikely to know which scoring model to use in your situation to generate your score.

Next Steps

Your credit score plays a vital role in your financial well-being. Before applying for credit, take the time to establish your credit score. With stronger credit, you can increase your chances of being approved for the financial products you want at the best possible rates and terms.

Avoid asking for more credit cards in a short period of time. While a full consultation can reduce your score by a few points, several consultations over a short period of time can do more damage, unless you are looking for a house or a car, in which case you will probably have a grace period to shop around.



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