A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A higher score indicates lower risk.
There are two types of inquiries that can be made on your credit report: hard and soft.
Hard Inquiry: What is a hard inquiry? How does it affect your credit score?
When you apply for a loan or credit card, the lender will check your credit score. This is called a hard inquiry. Hard inquiries can negatively affect your credit score. They are also known as hard pulls.
A hard inquiry happens when a lender checks your credit report to make a lending decision. A hard inquiry can be initiated by you or the lender. For example, if you apply for a mortgage, the lender will do a hard inquiry on your credit report.
A hard pull usually drops your score by five to ten points. If you have several inquiries in a short period of time, it can signal to lenders that you’re desperate for money and are more likely to default on a loan. This can lead to higher interest rates and denial of loans.
Common examples of when hard credit checks occur include:
- Mortgage applications
- Credit card applications
- Personal loan applications
- Car loan applications
- Apartment rental application
- Cell phone contract
- Internet plan contract
Soft Inquiry: What is a soft inquiry? How does it affect your credit score?
A soft inquiry is a type of credit check that does not affect your credit score. Soft inquiries may be done by creditors when they are considering you for a new pre-approved credit offers, or by employers who are considering you for a new job.
Soft inquiries will not show up on your credit report, and they will not be seen by other lenders.
Common examples of soft inquiries include:
- Lender checks for pre-approved offers (i.e. line of credit, mortgage)
- Employer background checks
- Getting your free credit score from online sources (ex: Borrowell)
The Difference: What is the difference between a hard and soft inquiry? How does each type of inquiry affect your credit score?
A hard inquiry is an inquiry made by a creditor with the intention of extending credit. A soft inquiry is an inquiry made by a business or individual for the purpose of checking another individual’s creditworthiness. Hard inquiries can negatively affect your credit score, while soft inquiries will not.
When you apply for a new line of credit, the creditor will almost always do a hard inquiry on your credit report. This type of inquiry can ding your credit score by a few points and stay on your report for up to two years. So, if you’re planning on applying for a mortgage or another big loan in the near future, it’s best to avoid opening any new lines of credit in the months leading up to your loan application.
Soft inquiries are does not do any damage to your credit score while hard inquiries can lower your credit scores when they’re done.
Who looks at your credit score to make lending decisions?
When you’re looking to take out a loan, your credit score is one of the first things that lenders will look at. A good credit score means you’re more likely to get approved for a loan and could get a lower interest rate. Here’s a look at who looks at your credit score when making lending decisions.
Lenders are not the only ones who pull your credit score. Insurance companies, landlords, and employers may also check your credit history as part of their decision-making process.
Bottom Line
A good credit score can help you get approved for a loan and could save you money on interest charges. A bad credit score could mean you get denied for a loan or end up paying more in interest charges. If you’re looking to take out a loan, it’s important to check your credit score beforehand so you know where you stand.
It’s a good idea to review your credit report on a regular basis. This allows you to detect errors and dispute them in a timely manner. If you notice a credit inquiry that you did not authorize, contact your credit bureau and ask that it be removed from your report.