hard versus soft credit inquiry

Do you ever find that getting answers to one of your personal finance questions only introduces a string of new questions in your mind? One such financial topic is credit scores (and what affects them). More specifically, what happens when a third party, like a bank, checks your credit scores? Many worry that these credit inquiries hurt their credit scores, but the reality is that it depends on the nature of the credit inquiry. You may have heard the terms “hard inquiry” and “soft inquiry” and wonder what the difference is between the two. In this article we’re going to explain it all. We’ll start with the difference between hard and soft credit inquiries.

Hard Credit Inquiries Versus Soft Credit Inquiries

Credit inquiries aren’t all the same, and that’s a benefit to consumers. These inquiries can either be classified as hard credit inquiries or soft credit inquiries, and only one of them affects your credit scores.

What Is a Hard Credit Inquiry

The credit inquiry that most often comes to mind is the hard credit inquiry. A hard credit inquiry typically occurs when you apply for a financial product, such as a credit card or mortgage. Each application can show up as a new inquiry on your credit report.

The main thing to understand about hard credit inquiries is that they’re the result of a voluntary action on your part to obtain new credit. A hard credit inquiry only occurs when you submit an application for credit.

As for the numerical effect these have on your credit scores, a single inquiry or two won’t add up much. According to myFICO, one hard credit inquiry takes five points or less off your credit scores.

If you have a long credit history, there’s even less to worry about. Your credit scores will be more impacted by these inquiries if you don’t have many credit accounts or if you’re new to credit, likely because there won’t be many other factors that impact your scores.

The real trouble with hard credit inquiries is when they start to add up. If you regularly apply for new credit, it could appear to financial institutions that you’re desperate for credit – perhaps to make ends meet – and you might not be able to handle the new credit you take on. Here’s an explanation from myFICO:

“Large numbers of inquiries also mean greater risk: people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.”

In other words, too many credit inquiries could be considered with risky behavior, even if you’re more than prepared to handle whatever new credit you take on.

What Is a Soft Credit Inquiry

You know those promotional offers credit card companies love to send in the mail? You might wonder how they know if you qualify or if they send the offers out to everyone.

Well, they do know if you’re the type of customer they want before they send the offers, and that’s because they’re checking your credit first. But since you didn’t ask them to do that, your credit isn’t affected by it. Instead, these types of credit checks are classified as soft credit inquiries, which have no effect on your credit scores.

Remember, the key to understanding the difference between a hard credit inquiry and a soft credit inquiry is the way you apply for credit. A hard credit inquiry occurs after you voluntarily submit a full credit application, whereas a soft credit inquiry typically occurs when a financial institution requested your information to arrange a promotional offer. (A soft inquiry also occurs if your existing lenders look up your credit per their policy on managing accounts.)

So, what happens if you submit a full credit application after receiving one of those offers? At that point, a hard credit inquiry will result, since you opted into applying for the credit.

Soft credit inquiries also occur when you check your credit scores on sites like this or anywhere else that provides consumers with access to their credit scores for educational purposes. That means you don’t have to worry that checking your credit score will affect your credit.

Credit scoring companies understand why you would want to check your credit scores regularly, and they won’t penalize you for doing so. Therefore, if you’ve avoided checking your credit scores or reading your credit report in the past for fear of hurting your credit, don’t. Go ahead and check your credit scores and review your credit reports), knowing that doing so will only help you work towards the best credit profile you can have.

How to Keep Credit Inquiries From Hurting Your Score

In the grand scheme of things, credit inquiries don’t have a massive impact on your credit score. Hard credit inquiries only knock your scores down by a few points each, and soft credit inquiries don’t affect your score at all.

That said, there is a way to ensure that the impact of a hard credit inquiry is even smaller. It’s called rate shopping.

Here’s the thing. Credit scoring companies aren’t out to punish you for “bad behavior.” The scores are a tool that lenders can use to understand the level of risk in working with a particular consumer. But their models leave room for a consumer to shop around for the best interest rate before signing on a loan.

You can protect your credit score from too many hard credit inquiries by applying for credit in a way that shows you’re rate shopping. Here’s how:

1. Apply for One Type of Credit at a Time

The first step in making it clear you’re rate shopping rather than trying to get a whole bunch of new credit is to only apply for one type of credit at a time.

That means you should only apply for mortgages if you’re looking to buy a home, and only apply for auto loans if you’re going to buy a new car. And, unless you absolutely need to, don’t apply for credit cards while also applying for these loans.

2. Apply for the Same Amount of Credit

The next step is to fill out all of your credit applications for the same amount.

In other words, don’t apply for a mortgage of $300,000 with one lender and $400,000 with another. Multiple applications of the same type and amount will clearly show that you’re rate shopping.

3. Complete Your Applications in One Month or Less

Finally, you can show you’re rate shopping by submitting all of your credit applications within a short time frame. More specifically, do all of your rate shopping within 14-45 days.

Here’s why, according to myFICO:

“ … FICO Scores look on your credit report for mortgage, auto, and student loan inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span.”

As for the other major credit score, VantageScore®, it “treats multiple hard inquiries by utility companies, as well as those made in connection with mortgage and auto loans, as one inquiry, provided they are made within rolling two-week window.”

Since companies can use any credit score or any version they’d like, the safest bet when rate shopping might be to keep it within the shortest time frame of 14 days.

FREE TOOL: Are mistakes on your credit report hurting your credit score? Find out with Upturn Credit’s free credit repair tool.

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