Hard inquiries and soft inquiries are two different forms of checks made by potential creditors on a person’s credit rating or ability to repay a loan.
A key difference is that a hard inquiry will have a negative effect on your credit score, while a soft inquiry will not.
Another way to distinguish between the two is that the latter is made without your consent or knowledge.
Credit or risk scores are tools that enable lenders to assess your ability to repay a debt on time as part of their decision-making process. The higher the score, the more likely financial institutions, and insurers will offer you credit.
One of the more well-known credit scores is FICO scores, created by Fair Isaac Corp. It is a three-digit number that indicates how likely someone can repay a debt. It ranges from 300 to 850.
An individual’s creditworthiness is often based on the analysis of the person’s previous record of repaying loans. Factors considered include payment history, amount of debt, and the length of credit history.
Having a good score may save you hundreds or thousands of dollars because it will help you qualify for a loan with a lower interest rate.
The interest rates for auto loans, for instance, will be higher if someone’s rating is low. A person with a poor score of between 300-500 can expect to be charged as much as 10% more than someone with an excellent score.
This may work out to paying over $11,000 for a $30,000 loan over 72 months. Thus, the importance of a good score cannot be over-emphasized.
Besides borrowing money, a good score can also play a part in enabling you to rent the apartment you want or get that dream job. Utility, cable, internet, and cell phone providers will often check people’s rating as well.
Also known as a ‘soft pull’, a soft inquiry often occurs without your knowledge or permission. They are usually done as part of a background check to ascertain your creditworthiness or character. The good news is that soft pulls do not affect someone’s score.
Credit card companies usually do a check before sending you an offer of a card in the mail. It is good business sense to make sure they don’t waste postage on unqualified individuals.
If a financial institution, mortgage broker, or any lender approaches you with a pre-approved loan, it means they have already made a soft inquiry on your credit status.
Employers may check a prospective employee’s score before making a job offer because they believe a good score indicates the applicant has a high level of responsibility.
If you’re buying a car, you would want to pre-qualify for a car loan before you pick one out at the dealership. You don’t want to find your dream car and be disappointed when you find out that you don’t qualify for a loan because your credit rating is low.
Finding out how much you can borrow beforehand will also determine the car you can comfortably afford. It also speeds up the process as you know that the lender will approve the loan.
A hard inquiry or ‘hard pull’ requires your permission so you would definitely know when one is made, and you should want to know as it will affect your score.
When someone applies for an auto loan, mortgage, or any other loans from financial bodies, the lender will initiate a hard inquiry, which becomes part of that person’s credit report. The inquiry will then be information that is available to anyone who later does a soft check.
In general, hard pulls may take off between 5 up to 20 points from your score, depending on which credit scoring company is used. It is advisable to be careful not to accumulate too many hard inquiries as they can hit your rating very hard.
If you have a high credit score, it won’t matter that much, but if your score is low, you might want to limit the number of hard pulls so that it won’t make it difficult for you to get financing.
However, if you’re buying a car or a home, don’t be too concerned about racking up hard inquiries when shopping for the best rates.
FICO, for example, allows you a 30-day grace period before hard inquiries are shown in a credit rating. If the inquiries are for the same loan, the multiple pulls are considered a single inquiry. This means they only impact your score once for each loan application.
Other credit bureaus may treat inquiries differently, so be sure to enquire beforehand.
How do you know if an inquiry is hard or soft?
Soft inquiries do not appear on a credit report and do not affect someone’s score. They are usually used when you check your credit or when lenders or credit card companies want to pre-qualify you before they make you an offer.
Soft inquiries can also be initiated by employers for a background check to help them decide if you are a responsible candidate for the job.
Hard inquiries, on the other hand, will take points off your credit rating when applied. You have to be aware of your score before making any inquiries as they can adversely affect your rating if your score is already on the lower end of the scale.
These inquiries are usually used when you apply for a loan, and lenders need your credit information to base their decision on.
