When it comes to understanding how credit scores are calculated, credit inquiries play an essential role. There are two main types of credit inquiries: soft and hard. Knowing the difference between these two can help you make informed financial decisions and protect your credit score.
In this article, we’ll break down what soft and hard inquiries are, how they affect your credit score, and ways to manage them to maintain a healthy credit profile.
What is a soft inquiry?
A soft inquiry, also known as a "soft pull," is when your credit report is checked, but it doesn’t impact your credit score. Soft inquiries typically occur when:
You check your own credit report: Regularly reviewing your credit is essential for spotting errors and managing your financial health.
Pre-approval for credit offers: Lenders may check your credit to determine if you’re eligible for offers like credit cards or loans without affecting your score.
Employer background checks: Some employers perform credit checks during the hiring process.
Key characteristics of soft inquiries:
They do not impact your credit score.
They are only visible to you when you check your own credit report.
They provide a snapshot of your credit without being recorded as an active credit request.
What is a Hard Inquiry?
A hard inquiry, or "hard pull," happens when a lender or financial institution checks your credit report as part of a decision-making process for a credit application. These inquiries occur when:
You apply for a credit card, loan, or mortgage. Lenders need to assess your creditworthiness by reviewing your credit report.
You apply for a new line of credit: Whether it’s for an auto loan, personal loan, or credit card, the lender will perform a hard inquiry to evaluate your risk.
Key characteristics of hard inquiries:
They can affect your credit score. Typically, each hard inquiry will reduce your credit score by a few points (usually 5-10 points).
They remain on your credit report for up to two years but only affect your score for the first 12 months.
Multiple inquiries within a short time frame: If you're shopping around for the best loan or mortgage rate, credit scoring models often treat multiple inquiries made within a short period as one, so they have less impact on your score.
How Do Soft and Hard Inquiries Affect Your Credit Score?
Soft Inquiries:
Soft inquiries have no effect on your credit score. You can check your own score as often as you like without worrying about it dropping. Similarly, when a company or potential employer conducts a soft inquiry, your score remains untouched.
Hard Inquiries:
Hard inquiries can have a negative impact on your credit score, though the effect is usually minimal. Each hard inquiry may cause a temporary dip in your credit score by a few points. However, multiple hard inquiries over a short period (especially within 12 months) can indicate to lenders that you may be taking on more debt than you can manage, which can further lower your score.
For example:
Single hard inquiry: A single inquiry might lower your score by 5-10 points.
Multiple inquiries in a short time: If you apply for multiple credit cards or loans within a few weeks, it can suggest risky behavior, which may impact your score more significantly.
However, rate shopping—applying for a mortgage, auto loan, or student loan within a short period—usually counts as one inquiry under most scoring models (such as FICO or VantageScore). This reduces the impact on your credit score.
How to Manage Credit Inquiries and Protect Your Credit Score
Here are a few strategies to manage your credit inquiries and ensure they don’t negatively impact your credit score:
Limit hard inquiries: Only apply for credit when necessary. Too many hard inquiries in a short time can signal risk to lenders.
Monitor your credit report: Regularly checking your credit report will help you track any hard inquiries. You can request a free report annually from each of the three major credit bureaus (Equifax, Experian, and TransUnion).
Rate shopping: If you are shopping for a loan or mortgage, do it within a condensed time frame. Most credit scoring models will count multiple inquiries as one, which minimizes the impact on your score.
Check pre-qualification offers: Many lenders offer pre-qualification options, which involve a soft pull. You can check if you’re eligible for credit without affecting your score.
Review your existing credit: Before applying for new credit, make sure your current credit is in good standing. Keeping your utilization low and making on-time payments will help you maintain a healthy credit score.
In summary, soft and hard inquiries have different effects on your credit score. Soft inquiries are harmless and don’t impact your score, while hard inquiries can lead to a temporary dip. Understanding how inquiries work is key to managing your credit responsibly and ensuring that you maintain a strong financial profile.
By being mindful of how often you apply for new credit and by keeping your credit usage in check, you can limit the impact of hard inquiries on your score and achieve your long-term financial goals.
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