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Understanding Hard vs. Soft Credit Inquiries

Are you trying to maximize your credit score for a mortgage, car loan, or better credit card?

Understanding Hard vs. Soft Credit Inquiries

This is an updated blog post originally from April 2018

You have probably seen the terms "hard credit inquiry" or "soft credit inquiry" before. One important factor you need to monitor as a borrower is your credit inquiries, which makes up 10 percent of your credit score. But what are inquiries, and how do they work? Here is everything you need to know about hard and soft credit inquiries and their impact on your credit score.

What Is a Credit Inquiry?

A credit inquiry occurs when someone reviews your credit report. Another name for an inquiry is a hard credit check or soft credit check, otherwise known as a "credit pull”.

Credit inquiries come from the following sources:

  • Loan and credit card applications
  • Employment background checks
  • Apartment background checks
  • Credit card issuers pulling your credit report and credit history to determine if they want to send you an offer

What is the Difference Between Hard and Soft Inquiries?

Financial Institutions cannot affect your credit score without your permission, which is designated by the different types of inquiries. This is when the distinction between a hard and soft inquiry makes a difference:

  • Hard inquiries do affect your credit score. They are generally made when you act, like requesting a new credit card, loan, or mortgage.
  • Soft inquiries do not affect your credit score and are generally done without your knowledge.

Examples of Hard Inquiries

These are the common types of hard inquiries, including:

  • Credit card applications
  • Mortgage applications
  • Personal loan applications
  • Business credit applications backed by your personal credit

Examples of Soft Inquiries

These are the common types of soft inquiries, including:

  • Credit card offers you receive in the mail

Usually, the company makes soft pulls to determine the risk you may pose as a borrower. This will not impact your credit score but will give the potential lender an idea of your creditworthiness.

  • Account reviews

If you have an open credit card or other lines of credit, the lender may periodically check your credit to ensure you still meet their lending standards.

  • Checking your own credit report

Checking your credit online or getting a free credit score from your credit union is not a credit application, so it does not impact your credit score even though you initiated it. You can check your credit report through major credit bureaus like Equifax or Experian.

  • Checking for preapprovals

If you are exploring a credit card or lending website and see the words "check for preapproved offers," know this check is usually a soft pull. Look for language that explicitly states your credit score will not be affected.

Examples of Gray Areas

These gray areas can be either a hard or soft pull. How it is coded depends on how the lender makes the inquiry. Double-check their policies, and even then, understand it is probably safer to wait if you are in the middle of applying for a mortgage or adding another line of credit.

  • Credit limit increases

While this is a credit application, many credit card companies only make a soft inquiry when you request to increase your credit limit on an existing account due to your existing credit utilization.

  • Opening a bank account

Some financial institutions make hard pulls, some make soft pulls, and some do not check your credit report.

How Do Multiple Credit Inquiries Affect Your Score?

One final area of note is referred to as rate shopping. When you apply for multiple auto loans or mortgages within a short period of time to find the best interest rate, the credit reporting agencies usually combine the inquiries, so they only have the scoring effect of a single inquiry

Are Hard Inquiries Bad?

A single hard inquiry is not bad, but if you have several hard credit inquiries in a short period of time, it may indicate to lenders that you are seeking loans you may not be able to pay back. Each hard credit pull can reduce your credit score between 5 and 10 points and make it more challenging to get approved for new lines of credit, so while one pull may not have an impact, multiple hard inquiries could result in a low credit score.

Credit bureaus use various credit-scoring models, such as the VantageScore 3.0 model used by TransUnion, which drives how credit inquiries show on your credit report. Multiple loan applications in less than 30 or 45 days may also indicate you are seeking the best interest rates for your mortgage or auto loan, and the credit bureaus may bunch them into one inquiry. Bunching inquiries will show as one pull, thus minimizing the impact on your credit score.

How Long Does a Hard Credit Pull Last?

Regardless of the type of credit inquiry, credit pulls stay on your credit report for 2 years. However, an inquiry only affects your credit score for a year. The impact of hard pulls lessens over time, and they will carry less weight with a new credit request.

How to Decrease the Impact of Hard Credit Checks?

If you are worried about hard inquiries impacting your credit score, managing your credit responsibly is the best way to minimize the effect. This includes making payments on time, keeping balances low, and only applying for new credit when you need it.

Your payment history is essential because it shows lenders how you have handled credit in the past and that you are a reliable borrower. Keeping your balances low is also important because it shows lenders you are using your credit sensibly and not excessively.

How to Appeal Credit Inquiries?

If you believe a hard inquiry was made in error, you can contact the credit bureau to dispute the inquiry. If the inquiry is incorrect, it will be removed from your report, and that inquiry will not impact your credit score.

Navigating Hard and Soft Inquiries with TDECU

At TDECU, we understand that your credit score is essential. We are here to assist in navigating hard and soft inquiries to help you manage your credit responsibly. Contact us today to learn more about our policies on hard vs. soft inquiries or to discuss our lending criteria for a mortgage, auto loan, or credit card.