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When I was first starting my adult life, I had no idea how credit worked. I would receive credit card offers in the mail for cards I know I didn’t apply for.
How did they know that I would be a good candidate for a line of credit? It would be years before I realized that they were actually performing soft credit checks to determine if I was a responsible borrower.
Once I found out, I wanted to make every effort to protect my credit as much as possible.
The good news is that I learned these types of inquiries didn’t have an effect on my overall credit score. I began to learn the difference between hard credit checks that I authorized and the soft credit checks that I didn’t always know about.
Hard pulls and soft pulls of your credit are important tools for lenders to determine whether you are a responsible borrower.
You should know the difference between these two types of reports and how to manage them to keep your credit score pristine. How do they impact your credit score and what can lenders actually see?
If you are ready to learn more about how these checks work, this guide is just for you!
What is the Difference Between Hard Check and Soft Check?
If you are thinking about applying for a new loan or credit card, you may already be aware that lenders want to check your credit history before offering up an approval. There are two distinct ways that they can look into your past financial history.
They are known as hard credit checks or soft credit checks. Understanding the difference between these two items is key if you want to keep your finger on the pulse of your financial health.
Hard Credit Check
A hard credit check, also known as a hard inquiry or a hard pull, is when a financial institution checks your credit before issuing a decision. This is typically done when you apply for a major loan such as a mortgage, a car loan, or even a new credit card.
You must give your consent and authorization for a lender to pull this information about you.
A hard inquiry does show up on your credit report for future lenders to view. It will remain on your report for two years. They can have an adverse effect on your credit score.
When a lender pulls a hard credit check, they can see your entire credit history including your open lines of credit, all loans you have, your payment history, and any debt that has already gone to collections.
They can also see all of the other places that you have applied for new loans or lines of credit with additional hard credit pulls.
Soft Credit Check
On the other hand, a soft inquiry does not require your consent. They are used when credit card companies want to pre-approve you for a new card, when you fill out an insurance application, when your employer runs a background check, or when you check your own credit score.
These inquiries do not show up on a credit report and do not have any impact on your credit score.
A soft credit check can show the same information as a hard credit check, but there are a few exceptions. For example, employers will often use a soft credit check to gain more information about you.
However, they do not have access to your actual credit score, any of your account numbers, or your personal information such as birth year and marital status.
Employers can only use your credit history to determine if you are financially responsible. They can see if you have paid your bills on time or if you have bills that have been sent to collections.
Credit card companies are the most well-known example of using soft credit inquiries. They can see your payment history and if any of your accounts have gone into collections.
If they have not, they may pre-approve you for a new credit card. This is how you end up with all of the credit card offers in your mailbox. While you did not apply for these cards, they are hoping they can entice you to enroll if you are a financially responsible consumer.
Insurance companies can also view your credit history with a soft credit check. These often occur without your authorization. Much like an employer, they cannot see your full credit score.
Instead, they see an insurance score that is similar but not quite the same. They can also see if you have applied with other insurance companies or if other companies have made inquiries into your account.
Is One More Accurate than the Other?
You might be wondering how these two types of inquiries stack up against each other. Is one type of inquiry more accurate than the other? There is not a huge difference between these two types of reports.
However, there are small differences that make the hard credit check a bit more accurate.
A hard credit check gives lenders and creditors a full glimpse into your credit history. No information is excluded on these types of reports. They can see your full credit score and history with your permission.
A soft credit check does not give the same access to those who pull it. In many scenarios, some of the information is filtered. For example, employers can’t see full credit history or account numbers.
It is used to get a general sense of your financial health, but it does not provide all of the information included on a hard credit check. Its scope is significantly more limited than that of a hard credit pull.
How Does it Affect Your Credit Score?
If you are concerned about the health of your credit score, you may want to reconsider applying for a bunch of credit cards all at one time. Hard inquiries do show up on your credit report and remain there for up to two years.
How does this impact your actual credit score?
A hard credit check can decrease your score in the short-term. If you are using the FICO credit score referenced by most lenders, you will see your score take a quick nosedive. They estimate that a hard credit inquiry can drop your score by as much as five points.
If you were already on the cusp of qualifying for a new mortgage or loan, then you might want to be careful with how many inquiries you send out at one time.
Why does your credit score decline when you apply for new credit lines? The answer is relatively simple. Consumers who are applying to borrow money in the form of a loan or credit card are oftentimes viewed as financial risks.
Applying for a single loan won’t give lenders this impression, but you should avoid having multiple inquiries show up on your credit report in a short period of time. Those with five or more credit inquiries in the span of a year are significantly more likely to default on a credit obligation.
You will be viewed as a risk because it looks like you need to borrow money to meet your monthly obligations.
There is an exception to this rule though. You are permitted to shop around for the best loan terms when applying for a new loan such as a mortgage or an auto loan. The first hard credit inquiry may damage your score, but the subsequent inquiries will not.
There is a two-week grace period where you are rewarded for being a savvy shopper. You can apply for the same loan with multiple lenders during this window of opportunity without being penalized more than once.
On the other hand, a soft credit check will not damage your credit score. They do not show up on the credit reports seen by lenders. Instead, they are only visible on consumer disclosures or the credit reports that you personally can access.
How to Check Your Credit Score Without Hurting It
Keeping tabs on your credit score is essential if you want to know where you stand with lenders. Fortunately, there are a number of ways you can check your credit score without hurting this crucial number.
Checking your credit score has very little cost and does not dole out damage to your score. How can you check your own credit score?
Complimentary Credit Score with Credit Cards
If you already have a credit card, you may be in luck. Many of the major credit card companies understand just how important it is to keep tabs on your overall credit. As a result, they may offer you a complimentary credit score when they send out your statements.
Be sure to look at your most recent statement to see if there is a section for your credit score. Alternatively, you can do some exploring in the online portal to see if you have access to this score.
This is how I personally keep tabs on my credit score. Each month, I get an update on how well I am doing financially on my statement.
This has helped me to keep tabs on how quickly my score is growing so that I know when I meet the threshold for better terms with new loan products such as auto loans or a new mortgage.
Check with the Credit Bureaus
For those who want a reliable source of information, you may want to check with the credit bureaus to see what they offer in terms of credit score management. Experian offers a free credit report and FICO score without the need for you to put in any credit card information.
There are no penalties for accessing your credit score on their platform. You’ll get a refreshed report every thirty days.
Transunion also offers access to your credit score, but they use the VantageScore model instead of the FICO score used by most lenders. You will also face a monthly premium for access to this service. Expect to pay $24.95 per month to utilize Transunion.
Credit Karma
Many people are familiar with the Credit Karma site, even if they have never used it before. This site gives you free access to your credit score and credit reports from two of the three credit bureaus (Transunion and Equifax).
With this information, they can calculate your approximate credit score. Be aware that they do not use the FICO scoring system. Instead, they use their own VantageScore calculation, so it may be different than what a lender will see when they pull your credit report.
However, this score should be similar to your FICO score.
Utilizing the service is free, but you will be plagued with advertisements for additional financial products. You will never be asked to enter a credit card on their platform unless you want to opt into one of the offers that they show you.
These offers are how Credit Karma stays in business. They receive a kickback when you sign up for a new credit card, loan, or financial service from one of their partners.
myFICO.com
Another service that allows you to access all of your credit information in one convenient location is myFICO.com. This site allows you to access your credit reports and scores for a small monthly fee. They have several different packages to choose from with prices ranging from $19.95 per month to $39.95 per month.
At their most basic level, you receive coverage from Experian and monthly updates. They will show you your scores for mortgages, auto loans, and more. You also gain access to score and credit monitoring, identity theft insurance and identity restoration. There are plenty of benefits to signing up for one of these accounts.
You gain additional perks for the more expensive packages, including complete coverage from all three credit bureaus.
Managing Your Credit History
It is always a good idea to keep tabs on your credit report. While it is not the same as knowing your credit score, it is equally important for your financial health. The information contained within the report influences your FICO credit score, so it is extremely important to make sure that all information listed is accurate.
You can access a free copy of your report from each of the three credit bureaus annually through the well-known website AnnualCreditReport.com.
When you pull up this information, it is important to pay careful attention to the hard inquiries on your report. If you see inquiries that you did not give permission for, you can dispute them in writing with the credit bureau. It can take some time to get issues like these resolved, and it can be quite a tedious process.
However, it is ultimately important for your financial health. It can help to nip fraud in the early stages and keep your credit score pristine for years to come.
How to Manage Credit Inquiries
Knowing the difference between a hard and soft credit check is essential to managing the health of your finances. A hard credit check is done with your permission and gives lenders access to your full credit history, but it can negatively impact your credit score in the short-term.
A soft credit check is often done without your permission, and it does not have an impact on your credit score.
It is always best to use soft credit pulls whenever possible. However, you can shop around for the best terms on your new loan with a two-week shopping window where multiple hard inquiries will only be counted as one.
Be sure to keep tabs on your credit score, as this can be done without damaging your score. Your credit card company may offer you free access to this score, or you can check it through sites like Credit Karma and the major credit bureaus. Always keep a close eye on your credit report to spot any inquiries that you didn’t authorize.
Monitoring your credit is important for the health of your finances. Be sure to keep tabs on just how many hard inquiries you are making to prevent your score from taking too much of a nosedive!
