How Do Soft and Hard Credit Checks Affect Your Credit?

While managing your finances or looking for a new loan or credit card, you've likely come across the concept of soft vs hard credit checks, also known as soft and hard inquiries. They're both similar in that lenders use them to check your credit score and history to determine how likely you are to pay back the loan in full. From there, they can calculate the rates and terms they'd like to offer you. However, soft and hard credit checks can have different purposes and credit score effects. Read on to learn more about their differences.

Hard Credit Checks

Many lenders run a hard credit check when you formally apply for an online loan or credit card, and you generally have to authorize this inquiry. Through hard credit checks, lenders can look for information related to collections and bankruptcy, check out your payment history, and more. They can then make decisions regarding approval, rates, and terms.

Hard inquiries show up on your credit report. They knock your score down a few points, especially if you don't have an established credit score or history yet. Fortunately, hard inquiries are removed from your credit report after two years. Once your credit history is older, hard inquiries don't do much damage at all.

That said, you shouldn't apply for too many new loans or credit cards at once. Multiple hard inquiries in a short amount of time can have a larger impact on your score. Plus, lenders may turn you down for new debt if they see several recent hard inquiries in a short time. 

Hard Credit Check Examples

You might experience a hard credit check when applying for:

  • Auto loans
  • Credit cards
  • Mortgages
  • Personal loans
  • Student loans
  • Apartments (some landlords run hard credit checks to ensure rent payment)

Soft Credit Checks

Soft credit checks are more informal. Some companies use them alongside background checks when hiring. However, some lenders use them as well when considering borrowers for new loans, sometimes called a prequalification. Prequalification is where a lender runs a soft credit check on a borrower to propose potential loan terms if the borrower wants to apply. It's basically the lender saying, "You have an excellent chance at being approved for a loan of X at Y interest rate for Z months." Soft pulls don't harm your credit at all, and you don't have to authorize them. When you check your credit score, you're technically running a soft pull, as this also does not harm your score.

Soft Credit Check Examples

Here are some instances where you might be subject to a soft credit check:

  • Checking your credit score on a credit monitoring website
  • Prequalification offers on loans, credit cards, and insurance policies
  • Employment verification

Soft vs. Hard Credit Checks: In Summary

Soft and hard credit checks display the same information — your credit score and history. Where they differ is their uses. Hard credit checks are used to determine your eligibility for new debt after applying. They slightly ding your score since lenders have found that people applying for new credit can be slightly riskier.

Soft credit checks, on the other hand, don't harm your score. They're used to prequalify you for debt and sometimes used for eligibility for new debt as well. By waiting for a lender to run a soft credit check and send you a prequalification offer, you can maximize your chances of getting approved, minimizing your hard inquiries and keeping your credit score healthy.

Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.