There’s a lot of confusion out there when it comes to credit inquiries and your credit score. The short-and-sweet version? Hard inquiries affect your credit score, soft inquiries don’t.
But how else do these two types of credit checks differ from each other? Let’s take a closer look to clear up the confusion.
What is a credit inquiry?
Simply put, a credit inquiry happens any time a potential lender, employer, yourself or other entity checks your credit report.
There are two types of credit inquiries:
- Soft inquiry (soft credit pull)
- Hard inquiry (hard credit pull)
Both types show up on your credit report with details about who viewed your information. But there are some key differences between them. …
What is a soft credit inquiry?
A “soft” credit inquiry (soft credit pull) is any request for credit information from a group, business or entity that is not a potential lender trying to decide whether or not you qualify for credit.
Soft credit checks do not hurt your credit score.
The Fair Credit Reporting Act has rules about who can view your credit report and for what reason. And federal law requires that any soft inquiries show on your credit report for up to 24 months after they’re made.
Here are three reasons a soft credit check might happen:
1 – If a lender wants to pre-approve you
If a lender – like a credit card company or mortgage broker – wants to pre-approve you for a credit card or loan, they will do a soft pull on your credit report. They do this before sending you a promotional offer for credit to check if you’re qualified to apply.
Keep in mind that being pre-approved does not mean you are guaranteed to get the credit card or loan, since a soft inquiry usually doesn’t show as much detail as a hard inquiry would.
If you respond to the promotional offer and apply for the product, the lender would then need to do a hard inquiry to verify your eligibility.
Tired of receiving prescreened offers in your mailbox? Opt out at optoutprescreen.com. You have a choice to opt out for five years or permanently. Don’t worry, you can opt back in at any time.
2 – If you’re applying for a job
Many companies do a soft credit pull as part of a standard employment background check. If your job involves dealing with sensitive financial information or security clearance, you will likely face a credit check.
An employer credit check is designed to check for financial problems that could pose a problem on the job. Just like you would submit a professional resume when applying for a job, your credit report acts like a financial resume.
Unlike prescreened offers, employers who want to pull your credit must receive your signed consent first.
3 – If you want to check your own credit
It’s also a good idea to check your credit well before you make a major purchase, like a house or car. That way you can work on building your credit to qualify or get a lower interest rate if need be.
While you’re limited to one free copy from each credit bureau – Experian, Equifax and TransUnion – every 12 months, you can check your own credit report as many times as you want without hurting your credit score.
What is a hard inquiry?
A hard inquiry occurs any time you apply for a line of credit, such as a credit card, mortgage, personal loan, etc and are usually more in-depth than soft inquiries. Unlike soft credit checks, your consent, which is usually part of the application process, is required before hard inquiries can be done.
Although both hard and soft inquiries show up on your credit report for 24 months, only hard inquiries impact your credit score.
“The impact from applying for credit will vary from person-to-person based on their unique credit histories. In general, credit inquiries have a small impact on your FICO scores. For most people, one additional credit inquiry will take less than five points off their FICO scores.”
If you have fewer accounts or a shorter credit history, hard inquiries could have a greater impact on your credit score.
That’s why some experts recommend you don’t apply for any new lines of credit within one year of buying a home – you don’t want to hurt your score right before you need it most.
Hard inquiries, often called new credit accounts, count for roughly 10% of your FICO credit score. If you apply for too many new lines of credit in a short timeframe, lenders might view you as too dependent on credit and consider you a higher risk.
In general, a large amount of inquiries translates to greater risk because it indicates that you are regularly seeking out financial assistance. MyFico.com suggests that:
“Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”
While credit bureaus keep hard inquiries on your credit report for 24 months, when it comes to calculating your FICO Score, these inquiries only impact your score for 12 months, according to Experian.
What if you want to shop around?
If you’re planning on buying a home or getting a car loan or student loan, it’s a good idea to shop around for the best rates and options. The good news is, there’s a way to do that without facing multiple hard inquiries. It’s called “rate-shopping.”
Let’s take the example of shopping for a car loan. As long as you make all your inquiries for car loan rates within a 30-day time period – what’s considered a single “shopping period” – it counts as just one inquiry on your credit report.
For the newer FICO scoring models, this shopping period spans 45 days. Though individual lenders choose which version of FICO they want to use.
What to do if you don’t recognize a hard inquiry on your credit
There are several steps you can take if you see a hard inquiry on your credit report that doesn’t look familiar.
1 – Ask first
The first thing to do if you notice a hard inquiry on your credit report that you don’t recognize is to double-check the lender’s name. Sometimes, the name that shows up on your credit report looks different than the name you’re familiar with.
For example, I once applied for a mortgage where the company name that I interacted with was different than the name that showed up on my credit report. However, all the other information – the date the inquiry was made, what the inquiry was for, etc., matched up.
In this case, I followed up with my contact at the mortgage company and asked. They were able to confirm that it was, in fact, them who had made the inquiry. Asking them saved me the headache of going through the dispute process, which is step two.
A general rule when it comes to finances? If you’re not sure, ask first.
2 – Start with the creditor listed
If you’re sure that the creditor listed on your credit report is not associated with an existing account in your name, contact the creditor directly and ask them to remove the incorrect hard inquiry.
It’s generally a good idea to follow up with any verbal requests in writing and keep copies of everything.
The Consumer Financial Protection Bureau (CFPB) has a dispute letter template you can use to make this easier. You can find the template HERE.
3 – Escalate to the credit bureaus
If the lender is unwilling or unable to work with you, you can file a dispute directly with each of the three major credit bureaus and ask to have the hard inquiry removed from your credit report.
Here’s a link to file a dispute with each bureau:
If you notice several hard inquiries that were not based on your credit applications, you may consider looking into identity theft, and taking stricter action like placing a fraud alert or a credit freeze on your credit report to protect yourself.
The bottom line
If you’re trying to build your credit, paying attention to hard credit inquiries is an important part of the process.
In general, try to apply cautiously to credit and only take on new debts you know you can afford to pay back. And be sure to review your credit report regularly to check for errors or other issues.