The Differences Between Hard and Soft Credit Inquiries
Credit checks (ie. inquiries, pulls, etc.) come in two forms; soft credit inquiries and hard credit inquiries. Both forms serve their own purposes and have different effects on an individual’s credit score.
Unfortunately, many misconceptions lead others to believe that all forms of credit checks are negative and must be avoided at all costs. These commonly-held beliefs are inaccurate and do not provide context into when, why, and how they occur. To clear up any misunderstanding, below are three fundamental differences between soft and hard credit checks, that otherwise are mistakenly categorized as all the same.
Hard credit inquiries are necessary for certain situations, while soft credit inquiries are generally not mandatory
Soft credit inquiries occur when individuals check their own credit score, an employer does a background check, a financial institution pre-approves an individual for an offer, and many other instances. In most cases, these soft pulls are not required for major financial decisions, such as taking out a loan. When an individual applies for any type of loan (car, home, credit card, etc.), hard credit inquiries are required so the lending institution can assess one’s financial history and approve them for the correct loan amount, or reject them entirely. While it is unfortunate that these pulls have a short-term detrimental effect on the lendee’s credit line, it is unavoidable and a necessary part for getting approved for a loan.
Soft credit checks do not harm your credit score, while hard credit checks can
Soft credit inquiries never affect your credit score, no matter how often they occur. A big misconception about credit health is that you should avoid checking your score often or at all, when in fact you are free to check your score as much as you’d like. Since other institutions may run a soft credit inquiry without your expressed permission, these also go unpenalized.
A single hard credit inquiry, on average, can drop one’s score anywhere from one to five points. They negatively affect your score for about one year, and stay recorded on your credit history for about two years. While they may be necessary for obtaining a loan or other line of credit, it is important to keep the amount of hard inquiries to a minimum. If someone has numerous hard credit inquiries within a short time span, this is seen to lenders as risky behavior and indicates a lack of sufficient buying power on behalf of the individual.
Hard credit checks require your consent, and (sometimes) soft credit checks do not
As previously discussed, when someone applies for a mortgage, car loan, or other type of credit, a hard credit inquiry must be conducted. Since these inquiries temporarily lower one’s score, it is imperative that the applicant be let known and give consent to the financial institution to carry out said process. In certain scenarios, a soft credit inquiry does not require the consent of the individual. For example, when one receives a pre-approval offer for a new credit card in the mail, the financial institution did a soft credit check on that individual to see if they qualified for their promotional offer. An employer may also conduct a soft credit check as a hiring gauge, which may or may not be disclosed to the applicant.