When it comes to applying for a loan or line of credit, you may have heard of credit checks. But did you know that not all credit checks are created equal? The type of credit check can have different effects on your credit score. Let’s dive into the difference between a soft credit check and a hard credit check.
What is a Soft Credit Check?
A soft credit check, also known as a soft inquiry, is a review of your credit file by lenders. This type of check includes prescreened offers, prequalification for a loan or line of credit, and even requesting a copy of your annual credit report. Soft inquiries do appear on your credit report but do not negatively impact your credit score. They can stay on your report for one to two years.
What is a Hard Credit Check?
On the other hand, a hard credit check, also known as a hard inquiry, is made by lenders or creditors when you apply for credit or a loan. This includes credit cards, personal loans, auto loans, mortgages, and more. Lenders make a hard inquiry to assess your creditworthiness and determine the risk of lending to you. Hard inquiries can impact your credit score and stay on your credit report for up to two years.
When is Each Type of Credit Check Used?
Soft credit inquiries are typically used for prescreened credit offers, prequalification for a loan or line of credit, and when you request a credit report from a credit bureau. On the other hand, hard credit inquiries are used when you apply for a loan or line of credit. It’s important to note that both types of inquiries require your permission, and your credit file should not have a freeze or block on it.
How Credit Inquiries Affect Your Credit Score
Both soft and hard credit inquiries will appear on your credit report. However, only hard inquiries can have a negative impact on your credit score. Hard inquiries can lower your score, but this effect is usually temporary, lasting for about 12 months. If you are shopping around for credit, multiple inquiries within a specific timeframe are typically treated as one inquiry by most credit scoring models.
It’s essential to be mindful of the number of hard inquiries you have on your credit report. Applying for credit only when necessary can help you avoid unnecessary dips in your credit score. If you’re working on improving your credit, consider using credit builder apps like Brigit to help raise your score.
Frequently Asked Questions (FAQs)
Can you reduce the impact of a hard credit check?
If you’re comparing options for a loan or line of credit, you can minimize the impact of a hard credit check by making multiple inquiries within a designated period. This shows that you’re actively seeking the best rates and terms and not just facing financial hardship. If you believe a hard inquiry was made in error, you can dispute it with the credit bureau or the lender. However, hard inquiries resulting from identity theft cannot be removed from your credit report.
How long do inquiries stay on your credit?
Both soft and hard credit inquiries can stay on your credit report for one to two years. However, only hard inquiries have the potential to affect your credit score, usually for up to 12 months.
How many points does a hard inquiry affect credit score?
A hard inquiry typically affects your credit score by 1 to 5 points and usually only causes a temporary dip in your score for about 12 months.
Remember, understanding the difference between soft and hard credit inquiries can help you make informed decisions when it comes to your credit. For more personal finance tips, visit Personal Finances Blog.