by Monica DeVore
If you’ve ever applied for a loan or a credit card, you probably already know potential creditors check your credit. When a lender or other entity “pulls your credit”, it can have varying impacts on your credit score.
What you may not know is that there are two different types of credit checks: a “soft inquiry” which does not adversely affect your credit score, and a “hard inquiry” that certainly will. Fortunately, The Fair Credit Reporting Act has placed clear restrictions on when and why these credit reports can be pulled. Here’s some information to help you get a clearer understanding of the difference and why it matters.
What is a soft credit inquiry or “soft pull”?
A soft credit inquiry occurs when your credit report is checked and you haven’t applied for credit. More often than not, this happens without you ever knowing. The great news is that soft inquiries do not affect your credit score or show up on your credit report. Some examples of soft inquiries are:
- Promotional Credit Card Offers – You’ve probably received them in your mailbox. They’ve already done a soft inquiry to see if you would possibly qualify for their card.
- Insurance Companies – Review to assess any risk they may feel exposed.
- Landlords – Again this is to assure them they are accepting a tenant who will provide rent payments as lease requires.
- Potential Employers – May feel more comfortable hiring someone with good credit, as they think it indicates a more responsible individual.
- Loan Pre-Approvals – These initial inquiries give a mortgage broker or other lender good indicators of a successful outcome from your loan application.
Checking your own credit is a soft inquiry, so never be afraid to check your credit over concerns that it may hurt your score. Once a year you can get free credit report from each of the three major credit-reporting agencies. I can’t stress the importance of this simple task enough. You may not be car shopping currently or embarking on the exciting journey of buying your first home now, but do you want to encounter a troubling surprise in the midst of those big decisions?
What is a hard credit inquiry or “hard pull”?
These are the inquiries you will know about – or better know about! They require your consent. Hard inquiries do affect your credit score. These inquiries are triggered when you apply for big items like:
- Mortgages
- Automobiles
- Personal or Business Loan
- Student Loans.
Hard inquiries become part of your credit report, which means anyone who does either type of pull will see them. Hard inquiries can also shave points off of your credit score. Don’t let that keep you from “rate shopping” for specific items (for example – a mortgage or auto loan), because all those done within a 45-day window are typically considered one.
Don’t go overboard though! Consider whether those promotional credit card offers are worth the ding to your credit. You don’t want to look like a risk to lenders, who might be concerned about your ability to pay back the debt. If you have outstanding credit, those points may not have a huge impact. If your credit quality or history is borderline, think twice. Note: Mortgage loans have very clear credit score requirements… Is that instant 10% savings with an in-store credit card application worth losing out on purchasing your dream home?
A few key things to remember about credit inquiries:
- Drops in your credit score results in higher interest rates, which means you pay more over the life of a loan.
- New lines of credit may only represent 10% of your credit score, but always consider its impact.
- Credit inquiries factor into your credit score for only 12 months, but they stay on your report for two years.
- Too many hard inquiries (especially credit cards) in a short period of time could appear to a lender you’re trying to get a lot of credit quickly, which signals a possible higher credit risk.
- Take action to protect yourself from identity theft if you ever see a hard inquiry you didn’t initiate. Contact the reporting agency immediately!
KEEP YOUR CREDIT SCORE HEALTHY, avoid hard inquiries when you can. The best rule of thumb is to ask the creditor or lender beforehand what type inquiry they will be pulling. You can even check in with one of the credit bureaus. ALWAYS be proactive by maintaining close tabs on your credit report to make certain all information is both current and accurate!
Start now and retrieve your free credit report.
You can get an approximate credit score and an overview at CreditKarma.com.
These are the three reporting agencies:
You can also find a wealth of information from the Federal Trade Commission (FTC) about IDENTITY THEFT and Fico.com to assist with prevention and questions about how to resolve if you do encounter an error on your report.
