When lenders or creditors want to check your credit history before issuing you a loan or credit card, they perform a credit inquiry, also known as a credit check. Based on the information they find, including your credit score, they’ll determine how creditworthy you are and whether to approve your application.
However, there are two types of credit inquiries: hard and soft. Hard inquiries will affect your credit score, while soft inquiries won’t make a difference. You don’t get to choose which type of inquiry is performed, but creditors typically conduct each type of inquiry in specific situations. As long as you understand the differences between soft and hard credit inquiries and when each one is likely to occur, you can make smart credit decisions.
Lenders usually perform soft credit inquiries as a quick way to see if you’ll qualify for a loan or credit card. Even though the information it provides is limited compared to the results from a hard inquiry, a soft credit check still shows enough of your credit history for a lender to determine your creditworthiness.
Some situations where a soft inquiry is performed include:
Soft credit checks don’t affect your credit score at all, so there’s no downside if one is performed. It’s practical to determine your credit score and if you’ll be pre-approved for a loan or line of credit before you devote time and effort to a full application.
Lenders also find soft credit inquiries appealing since they can quickly see your credit score. A high credit score implies you’re good at managing your money, so they’re more likely to extend you credit or a loan.
A hard credit inquiry is a formal review of your credit report. Through a hard credit check, lenders will get a detailed look at your credit history, including your credit score, length of credit history, types of credit you’re using, and more. Every lender uses different criteria to determine whether to extend credit to you, and a hard credit check helps them decide.
Some situations where a hard inquiry is performed include:
Since hard inquiries affect your credit score negatively and stay on your history for three years, you must give the lender permission to perform one. If you’re applying for a job, you can ask the employer if their inquiry will be a hard or soft check.
It’s a good idea to limit the number of hard credit checks you approve and to avoid having multiple checks performed close together. If they see several hard inquiries on your credit report, lenders might wonder why you’re trying to access so much credit.
It’s impossible to avoid hard inquiries altogether unless you never apply for credit. But a few simple strategies can minimize the effects on your credit score.
Even though hard inquiries affect your credit, your score will recover over time. That means you can spread out your applications to give your credit score time to rebound in between them.
Avoid making multiple credit applications in a short period of time, since this could make your credit score drop quite a bit. This is especially important if you plan on applying for a mortgage in the near future, as lenders will be concerned about multiple recent hard credit checks on your account.
Since authorization is required for hard inquiries, you can dispute any inquiries on your account for which you didn’t give permission. Get in the habit of reviewing your credit report regularly through both Equifax and TransUnion. Although it may sound tedious, it could help you avoid fraud and it is smart financial management.
When you apply for pre-approval for a loan, mortgage or credit increase the lender will run a soft credit check, so you don’t have to worry about your credit score dropping. You might even request pre-approvals from several lenders to compare your options. Once the lender has pre-approved you, you can review the options and plan your spending accordingly. When you’re ready to make your purchase and you’ve chosen one particular loan, you can formally apply for it, so only one hard credit check is performed.
Knowing the difference between hard and soft credit inquiries is crucial to avoid damaging your credit score. It’s always in your best interest to maintain a good credit score, as it’s an essential factor in determining your creditworthiness.
If you are shopping for certain types of loans, such as a mortgage, you have some leeway. Multiple applications during a specific time frame — 14 to 45 days, depending on the credit scoring model — will be treated as a single inquiry. While each inquiry will show up on your credit report, only one will impact your score. This exception allows you to shop around and find the best rate without damaging your credit report.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.