We all know that checking a credit score is important to manage our finances. However, did you know there are a lot of factors that affect your credit score? For example, any error in your credit report or not using your credit cards can backfire against you. There is another important factor that affects your credit score, which is credit inquiries, specifically hard and soft credit inquiries.
When a credit report is pulled to check your credit score, an inquiry is conducted. A credit inquiry could be done in two ways:
- Hard Inquiry
- Soft Inquiry
The primary difference between hard and soft credit inquiries is that a hard inquiry will have an impact on your credit score whereas a soft inquiry won’t have one.
What’s a hard inquiry?
A hard inquiry is when any potential lender such as a credit card provider or any financial institution pulls your credit report when taking a credit decision. It is most likely that you know about the same because your consent is required.
When does a hard inquiry occur?
A hard inquiry can only happen if you authorize the institution to check your credit. This generally happens when you have applied for any form of a loan or credit card.
How long does a hard inquiry stay in my report?
All hard and soft credit inquiries take a period of two years(24 months) to fall off your credit report. However, the effect of an inquiry disappears or decreases even before the inquiry is removed from the credit report. This also does not imply that one should apply for too many loan or credit card applications at the same time- or even in a period of a few months.
This is because applying for credit at too many institutions at the same time can give the lender of you being a risky customer. The lender might feel that you are in dire need of credit and hence can default the payment. So, it is advisable to consider spreading out your applications.
How does a hard inquiry affect your credit score?
When a hard inquiry is conducted, it lowers your credit score by a few points, or may negligibly affect it. Generally, a single hard inquiry does not play a huge role in the drop of your credit score. There is no fixed number on how many credit inquiries will affect your credit score, although the effect is small.
Can you dispute hard inquiries?
If there’s a hard inquiry that is not authorised by you, you must inform the respective credit bureau about the error. You can either write or call the bureau and inform them. However, you must also check whether the respective inquiry is shown on all the credit reports generated by all credit bureaus. If you see the error in all the reports, then you can get rid of them by informing the creditor.
A hard inquiry is never bad for you, but necessary if you need any credit products. This is because the credit score lets the lender assess your creditworthiness.
#ProTip: You can check your credit score for free before you apply for credit to assess your financial standing. This will give you a better understanding as to when is the right time to apply for a credit card or personal loan. Another reason to do this is to identify any errors, such as an inquiry that is conducted without your permission and then disputing with the credit bureau.
What’s a soft inquiry?
A soft inquiry is when an individual checks his/her credit score to assess their own creditworthiness or when a company checks your score as part of a background check. For example, an employer checking your credit score for a background check will be considered as a soft inquiry.
Do soft inquiries affect your credit score?
A soft inquiry does not lower or affect your credit score. Depending on the credit bureau, the inquiry may or may not be reported. Since soft inquiries are conducted to assess one’s creditworthiness, only you can see the inquiries and not any lender. It is also to be kept in mind that checking your own credit score does not result in a hard inquiry.
Generally, a soft inquiry is when
- You check your own credit score
- A company in the position of an employer checks your credit score as part of a background check.
Can you see soft inquiries on credit report?
Unlike hard inquiries, soft inquiries do not affect your credit score. Since soft inquiries are conducted to check one’s own financial standing and are not connected to any credit application, they are not seen on your credit report. Only you can see the soft inquiries and not any potential lenders.
Do too many soft inquiries affect my credit score?
Even if you have conducted too many soft inquiries, it is never going to affect your credit score. None of the financial institutions or credit card providers can see the soft inquiries on your credit report. Hence, you can check your credit score as many times as you want without hurting your credit.
Examples of hard and soft credit inquiries
Here are the common cases when a hard inquiry is conducted:
- Mortgage applications
- Credit card applications
- Personal loan applications
- Auto loan applications
Here are the common cases when a soft inquiry is conducted:
- Checking your own credit score
- Employment verification for a background check
How to minimise the impact of hard and soft credit inquiries?
Now, you might be wondering how can you manage your hard and soft credit inquiries. By now, you would know that soft inquiries do not have any impact on your credit score. So, here are a few ways that can help you in managing your hard inquiries.
- You must check your free credit score to see if any hard inquiries that appear are authorized by you or are potential cases of fraud.
- Only apply for credit if you need it. It is important to understand that if you apply for credit otherwise, it would increase your hard inquiries, leading to an impact on your credit score.
- Do not apply for too many credit applications at the same time- or within a few months. This could adversely affect your credit score.
The difference between hard and soft credit inquiries boils down to whether it is you or it is any other party who pulls your credit report. Whether you give permission to conduct a check also needs to be considered.
Also, your credit report plays an important role in your financial well-being. Therefore, it does not just stop at checking your credit report but improving your credit score. With an improved score, the chances of your application getting approved are more.
