You may have heard that credit checks can negatively impact your credit score and that you should avoid them whenever possible. This common assumption is only partially true.
In reality, credit checks are just another normal piece of your financial life. In many cases, the only way you can move forward is to have your credit pulled and reviewed.
It’s important to know that not all credit checks impact your score in the same way.
What Is a Credit Inquiry?
A credit inquiry, which is also referred to as a credit check or credit pull, occurs when a company obtains and reviews your credit report.
Your credit report is a summary of your consumer financial profile and most often includes your loan payment history and debt-to-income ratio.
Why should I let someone check my credit?
Credit checks happen for many reasons, but their main function is to give a lender, landlord, or even potential employer a better idea of who you are and how reliable you are based on your credit history and credit score.
Whether your credit is in good shape or not, it’s natural to feel uneasy when someone checks your score. But it’s a necessary event, kind of like getting your teeth examined.
This is why it’s important to understand the different types of credit inquiries that exist, when they might happen, and how to make sure that your credit score isn’t significantly affected by them.
Soft Credit Checks vs. Hard Credit Checks
There are two main types of credit checks: soft checks and hard checks.
While they function in essentially the same way and serve the same purpose, the reason your credit is being pulled in the first place determines which type of check is performed.
What is a soft credit check?
A soft credit check is the most common type of credit inquiry. They happen all the time and can be executed with little information. Sometimes, soft credit checks even occur without your knowledge.
The most important thing to know about a soft credit inquiry is that it has absolutely no effect on your credit score. No matter how many soft pulls occur, you won’t lose any points.
This is because soft credit checks are generally utilized when there’s less risk involved. For example, if you aren’t borrowing money or opening a new credit line, then a hard pull usually isn’t necessary.
How is a soft credit check different from a hard credit check?
An important thing to note is that whether the credit check is hard or soft, the information in your credit report is the same. A hard check doesn’t reveal any additional information to those reviewing your credit.
So, if it’s effectively the same process, what’s the difference between the two?
Unlike soft checks, a hard credit inquiry does have an impact on your credit score. A single inquiry might temporarily reduce your score by a few points. To be clear, it won’t collapse the credit history that you’ve built, but too many hard credit checks can start to chip away at it.
Why does a hard credit inquiry hurt your credit?
Excessive hard inquiries, especially in a short period, indicate that you might be biting off more than you can chew. For example, the more credit cards you open, and the more money you borrow, the more of a risk you become in the eyes of a financial institution as a borrower.
The one exception here is rate shopping. For example, if you’re looking for a mortgage or auto loan and want to shop around for the best interest rate, you won’t be held accountable for running credit checks with multiple lenders. As long as you apply for the same type of loan within 30 days, each inquiry should fall under a single hard credit check.
None of this is to say that you should avoid hard pulls at all costs. If you plan to buy a home, pay for college with student loans, or pay off unsecured credit card debt with a personal loan, hard pulls are necessary from time to time.
The key is to keep the number of hard pulls on your credit history to a minimum and to try and avoid them while you’re working to build your credit up. Once your credit is in good shape, the few points lost from the hard inquiry are easy to make up.
How Do I Know If It’s A Soft Or Hard Credit Pull?
The only way to know if you will get a soft or hard check is to ask the company that’s pulling your credit.
Most companies have a disclaimer about whether or not the credit check will affect your score, but you can also reach out to customer service to be sure.
For example, some credit card companies only require a soft pull, while some bank accounts might insist on a hard inquiry. Although normally opening a savings account won’t impact your credit score.
Once your credit has been pulled, you can review your credit report. Hard inquiries will show up, and soft ones won’t.
If a hard pull shows up on your report that you don’t think should be there, it’s always a good idea to look into it. This could potentially be a sign of identity theft or a mistake on behalf of a financial provider.
When do soft credit checks happen?
Potential employers or landlords might do a soft pull as part of a background check. You can also expect one to occur when you open a new bank account.
If you’ve ever received a loan or credit card offer with pre-approval, you’ve already had a soft inquiry run without you even knowing it. This happens all the time: Credit card issuers take a look at your credit, figure out what kind of deal they can offer you, and send it along.
Reviewing your own credit report on free credit report sites is also considered a soft pull, so you won’t have to worry about your credit dropping when you keep tabs on it.
Generally speaking, if you have a very good credit score (above 740 points), you are more likely to qualify for premium credit card options and get all types of loan offers. Keep in mind, however, that premium cards often come with hefty annual fees, and almost all loans include expensive interest fees.
What Information Is Reviewed In A Soft Credit Check?
Your credit report is a snapshot of your entire financial life. Companies can see your payment history, available credit limits, credit utilization, outstanding loans, and available balances within it.
All of these factors, along with your credit history’s overall length, contribute to your FICO score, which is also simply called your credit score.
Your credit score is fluid and can rise and fall over time, depending on your financial actions. Here’s a look at how it’s calculated:
- Payment History: Generally speaking, your payment history carries the most weight in your credit report. Lenders want to know that you have a history of making payments and making them on time. Consistent payments over time can give your score a boost, while repeated missed or late payments can make it drop.
- Accounts Owed: Accounts owed refers to the total amount of money you owe and include outstanding loan balances and credit card utilization.
- Credit History Length: The longer you’ve shown that you can maintain good credit, the better it is for your score.
- Credit Mix: Your credit mix is the distribution of the types of credit that you currently hold. It’s usually a good idea to have a variety, such as a credit card, a car loan, and a mortgage. If you have a ton of credit cards and nothing else, it can be a potential red flag and negatively affect your credit.
- New Credit: New credit refers to any recently opened credit accounts, and this is where inquiries come into play. If too many accounts are opened with a hard pull in a short period, your score will take a hit.
Credit reports are provided to companies by credit bureaus, who compile your credit information and sell it to them.
In the United States, the three major credit bureaus are Experian, Equifax, and Transunion. While most companies utilize all three, some may only get information from one or two, and your score could vary slightly depending on the particular bureau.
Can Soft Credit Checks Help My Credit Score?
When your credit needs to be reviewed, it’s essential to do what you can to make sure that it’s in good shape.
Think of your credit report like your profile on a dating app. The more red flags pop up, like late payments, high credit utilization, or too many hard inquiries, the less attractive you seem to potential lenders or credit card issuers.
If your credit report reflects a consistent, positive credit history, you’re more likely to get approval and see favorable interest rates.
Building good credit is an important part of personal finance and can save you a ton of money over time.
Benefits of a Soft Credit Check
Simply put, a high score gives you more options, between qualifying for higher tier credit cards or being able to borrow higher amounts when you need to.
This is where soft credit checks play to your advantage. Since soft checks can happen without hurting your credit, you can use them to help build your credit in the long run.
Here are a few things that soft credit checks can help you accomplish:
- They let you review your credit report to know where you stand and where you have room to improve. This is essential to building your credit.
- Get pre-qualification for credit cards or loans. A higher credit limit and consistent payments can nudge your score in the right direction.
- Fulfill a background check for a new job. A new job itself won’t help your score, but more financial flexibility plays a huge role in building credit.
- Open a business bank account for an entrepreneurial venture
- Get approval for a lease on an apartment.
Check your credit history to avoid any fraudulent or incorrect hard inquiries.
Check Your Credit Regularly
I recommend regularly monitoring your checking account activity. Identity theft can damage your credit score in a hurry. Consistently checking your report and bank accounts for potential issues is a good practice.
Overall, a soft credit check should be thought of as a handy tool you can use in your financial life. When used correctly, soft credit checks help you move forward while keeping tabs on anything that could set you back.
Also, you can review a copy of your credit report anytime. A popular free credit score website is Credit Karma.
Building excellent credit takes time, but now that you know how soft credit checks work, you’re already on the right track.