Hard vs Soft Credit Inquiries: What's the Difference?
Being credit conscious and maintaining financial health through better credit management are increasingly becoming the focus of many Americans. With that, understanding what impacts your credit is key to preventing devastating dips in that oh so carefully cultivated credit score.
One contributing aspect of credit score that can often get overlooked is the impact of hard credit inquiries. What are hard credit inquiries? Hard credit inquiries are the result of a company pulling your credit from one or more credit bureaus with your permission and can impact your credit report in two ways. First, your credit report lists the number of hard credit inquiries you’ve had in the last 2 years. When applying for a mortgage, credit card, or other types of capital, financing and credit card companies look to the number of credit inquiries you’ve had as a data point in determining your ability to repay your loan. If you’ve had, say, 10 hard inquiries in the last month, a lender might assume you’re being irresponsible with your financial health. Bottom line, too many hard inquiries on your credit report equals a less likely chance of being approved for certain types of financing. Of course, so many people are victim of hard credit inquiry marks on their credit reports because they didn’t know any better. That’s why articles like this and educating yourself on credit can ultimately have the biggest impact on your credit standing.
Bottom line, too many hard inquiries on your credit report equals a less likely chance of being approved for certain types of financing.
The second way that a hard credit inquiry can affect your credit score is in points. Your credit score is determined based on a point system. There are several factors that impact your points. Available credit, debt to income ratio, credit history, and of course, those hard inquiries we’ve been talking about, all can impact your credit score. Each time you give authorization for a hard credit inquiry, you’re running the risk that inquiry will drop your credit score by several points, in fact up to 5 points. Sometimes your credit score will not suffer when you run a hard inquiry, and that’s great, but most of the time, you will see a difference. Even if your credit score isn’t impacted, you still have the inquiry listed, which can impact your approval for future credit. While you might not be declined for credit based on the number of hard inquiries on your report, your approval could be negatively impacted.
Negative impacts could include:
- Lower approval amount
- Increased APR
- Unfavorable terms
While a hard credit inquiry may now sound like something you just don’t want to do, that’s not explicitly accurate. Hard credit inquiries are necessary in some situations. Mortgages, auto loans, most credit card and financing companies all may require a hard inquiry. The trick is to limit the number of hard credit inquiries within a two-year period.
Typically, the number of inquiries related to excellent, good and bad credit scores within a two-year period are:
Excellent Credit: <2 inquiries
Good Credit: 2-4 inquiries
Bad Credit: 5+ inquiries
The good news is that there are many companies that now offer financing without a hard credit pull. How they do this is by doing a soft credit inquiry. Many credit card companies use soft credit inquiries to “pre-approve” customers. You probably have received marketing mail from these companies telling you, “You’re Pre-Qualified!” You may have wondered, “Hey, how’d they pre-approve me if I never applied?” The answer is simple. Credit card companies do not need your permission to do a soft credit inquiry on you.
While that’s a little disconcerting for privacy reasons, it’s also great news because it sets the stage for a very useful fact: Soft credit inquiries do not impact your credit score.
That’s right, you can have 100 soft credit pulls, and they will not list on your credit report. This is because the soft credit inquiry is something that can be done without your permission, and credit score overall is an indication of your financial responsibility. If you’re not responsible for the inquiry, it’s only fair that a soft inquiry done without your permission be left off your credit report. There are a few reasons why soft credit inquiries are made:
- A background check for employment
- A rental application/landlord.
- Preapproved credit card offers
- Review of credit standing for insurance
- Lenders and financial companies for credit worthiness
- Checking your credit through your credit card company or sites like www.creditkarma.com
You might at this point be asking yourself, “Why do we even need hard credit inquiries?” This is definitely a question modern financing companies have been asking recently. Credova Financial, for instance, started with hard inquiries for their applications. “Then, we realized that we could get quality information for our decision process with a soft inquiry,” says Kegan Peterson, Credova Director of Operations, “So we switched and don’t do hard inquiries anymore because it’s ultimately better for our customers.” It makes sense that in an era of corporate transparency and accountability, that responsible financial institutions begin to look for different methods of providing the best service possible to their customers.
One thing to note is that there is a slight difference in information retrieved from a soft credit inquiry vs. a hard credit inquiry. Often, the credit score itself will vary by several points from what’s shown on a soft vs a hard inquiry. A great way to make sure you stay informed about your credit health is to utilize your annual free report provided by the three credit bureaus, Experian, Equifax and TransUnion. Each credit bureau will send you a full report once a year, free of charge, and without any impact to your credit score.
The Takeaway Points
Keep hard inquiries to a minimum
While hard credit inquiries are sometimes necessary, make sure to limit the number of inquiries you allow within a two-year period. It’s best to keep the hard inquiries to a minimum, 2 or less, and only apply for credit when necessary.
Use strategy to increase your credit score
It’s also a good idea to strategically obtain credit, and an aspect of that is ensuring that credit inquiry monitoring is a part of that strategy. Don’t be afraid of a hard credit inquiry, as they are largely unavoidable, and when you’re educated about the consequences, you can monitor the impact an inquiry may have.
Monitor your credit
Soft credit inquiries happen without our knowing and can also occur without our permission. Even though a soft inquiry can occur without your consent, no one can open a line of credit in your name without your permission. It’s best to keep a close eye on your credit report and inform the credit bureaus of any suspicious activity. There are many options to track your credit. Some credit cards offer a free credit card monitoring service. Check with your current credit card company to see if this is an option. You can also utilize a free credit reporting tool like www.creditkarma.com. Credit Karma relies on soft inquiries to generate your credit report. Keep in mind, while soft inquiries are very accurate, there can be differences on your credit report between a soft and hard inquiry.
Keep an eye out for companies that respect your credit health
Hard credit inquiries might be necessary for certain types of loans, like home and car loans, but for some credit cards and payment options like Credova, hard inquiries are a thing of the past. Whenever you’re shopping for credit or financing, checkout the companies FAQ page or chat with a customer service representative and ask whether the full approval is a hard or soft inquiry. Legally, they have to receive your permission to do a hard credit inquiry, so make sure you’re paying attention to what you’re agreeing to in the company’s terms and conditions. There’s no harm in applying when it’s a soft credit inquiry, and most of the time you can always choose not to use financing you’re approved for if you so decide. Make sure to pay attention to companies like Credova Financial that have retired hard credit inquiries in lieu of more favorable soft inquiries. There’s many financing options out there, and making sure the company you choose to do business with has your best interests in mind will certainly be a critical aspect of your financial health.