Hard pull versus soft credit inquiry: What are they and why do they matter?

Before you take out a loan, one thing you might be looking at is your credit score. Lenders use this to learn about your past borrowing and payment behavior, because that tells them how likely you are to repay the loan. In other words, lending money is always a risk. A credit score is one measurement that helps lenders evaluate the risk.

Your credit score is one factor that could have an impact on your interest rate. It may not seem like a big deal, but if you’re talking about a loan you’ll be paying for years, a higher interest can add tens of thousands to your total payment.

Plus your credit score can influence other financial aspects of your life. Landlords, cell phone companies, auto insurance, even employers, will do a credit check to gauge your reliability. Neglecting your credit health can have long-lasting financial repercussions.

If you’re planning on a loan in the near future, it’s important to understand how the two types of credit inquiries — hard and soft — are different. Not knowing can result in unintended consequences.

What’s a soft credit inquiry?

Ever check your free credit score or get pre-approved for a credit card? Or maybe you’ve read about getting pre-approved for a mortgage. All three involve checking your credit history. Basically, it lays out how much you owe on different accounts, whether you’ve had any recent inquiries, and whether the account has gone to collections. These checks do not affect your credit score. While some free credit reports will show you how many soft inquiries have been made, these do not impact your credit score.

In fact, checking your credit as a consumer is part of maintaining good financial health, because doing so can alert you to problems or inaccuracies so you can address them.

If you see a hard inquiry from a lender you don’t recognize, look into it. It’s a sign that someone may be committing identity theft.

What is a hard credit inquiry?

When you apply for a loan or credit card offer, the lender will conduct a credit check. It’s noted on your credit report to reflect that a lender looked at your credit history to help them decide whether to lend you money, how much and at what interest rate.

A credit inquiry can lower your credit score by as much as five points, and stay on your report for up to two years.

So unlike a soft credit inquiry, you want to keep a hard limit on the hard credit inquiry. Why is that? If you have three or more inquiries on your report, that can raise red flags to a lender. They’ll want to know if you have too many bills to keep up with a brand-new payment. Because, again, the point of the credit inquiry is to make a calculated risk assessment on how likely you are to repay the money.

Here are another few things to know about hard credit inquiries that you may not be aware of:

• • What about your free credit score? If you get one of those nifty credit score reports from your credit card company or your money management app, the number you see may not perfectly match with what your lender pulls. That’s because different reporting agencies have different formulas, and follow different schedules. Any two scores should be close, but may not be identical.
  • You can still shop around for the best interest rate. If you’re buying a car or a house, you’ll want access to the best possible interest rate. For that reason, the major scoring models should take that into account. You won’t face a 20 point drop just because you were comparison shopping.
  • Overdraft protection gets hard credit inquiries, too. Though overdraft protection is a product offered by your bank, it does involve a revolving credit — a loan. Even if the bank offers the product, they will conduct a hard credit inquiry after you apply. Before you take the offer, factor that into your decision.

Let’s say you have opened more than one new account. Maybe there’s another important loan in your future, such as your first mortgage and auto loan, but you’re worried that the number of hard inquiries will hurt your chances. The important thing here is not to panic. Stay focused on making financially sound decisions:

• • Make on-time payments, each month, every month, no exceptions.
  • Pay ahead if you can, especially if we’re talking about a credit card balance or a line of credit. Minimizing your credit utilization rate can result in a higher score.
  • Finally, put the brakes on applying for new loans, especially credit card offers. No matter how attractive the terms, filling out that application will trigger a hard credit inquiry.

At Minnwest Bank, our lenders live in your community. When it's time to borrow money for your first house or a new set of wheels, we'll take time to help you understand your options, so you can make the best choice for your financial future. Make an appointment with a lender today.