When you apply for credit, whether it’s for a new credit card, a mortgage, or a car loan, the lender will often check your credit. These checks are called credit inquiries, and they can have a significant impact on your credit score. But not all credit inquiries are the same. Some will affect your score more than others. So, what’s the difference between hard and soft credit inquiries, and how do they influence your financial health? Let’s break it down.
What Are Credit Inquiries?
Credit inquiries happen when a lender, insurer, or service provider reviews your credit report. This allows them to assess your creditworthiness—basically, how likely you are to repay the debt. Your credit report includes information like your payment history, total debt, length of credit history, types of credit, and new credit accounts. When someone checks your credit, they’re seeing this data to make informed decisions.
There are two types of credit inquiries: hard inquiries and soft inquiries. Understanding the differences between these two is crucial because they have different impacts on your credit score.
Hard Credit Inquiries: The Bigger Impact
A hard inquiry (sometimes called a hard pull) occurs when you apply for new credit, like a loan or a credit card. Lenders or creditors do this to assess your financial habits and determine whether you’re a good candidate for their product. For example, if you’re applying for a mortgage, an auto loan, or a new credit card, the lender will perform a hard inquiry.
How Hard Inquiries Affect Your Credit Score
Hard inquiries can negatively impact your credit score, but the effect is typically minor. Usually, a hard inquiry will cause your credit score to drop by about 5 to 10 points, depending on your credit history. The reason for this is that applying for new credit suggests to lenders that you might be taking on more debt than you can manage.
However, don’t panic—the impact of a hard inquiry isn’t long-lasting. In most cases, it will only stay on your credit report for two years, but the effect on your credit score lessens over time.
It’s also important to note that multiple hard inquiries within a short period of time (like when you’re shopping around for the best mortgage rates or car loan) won’t hurt your score as much as you might think. The credit scoring models (like FICO and VantageScore) allow for a small window (usually 14 to 45 days) where multiple inquiries for the same type of loan (like mortgages or auto loans) are treated as a single inquiry. This is known as the rate shopping period.
Soft Credit Inquiries: No Impact on Your Score
On the other hand, soft inquiries (or soft pulls) are checks that don’t affect your credit score at all. Soft inquiries happen when you, a potential employer, or a company checks your credit, but there’s no decision to extend credit based on that check.
Examples of Soft Inquiries
Soft inquiries occur in a variety of situations, including:
- Checking your own credit report: When you check your own credit score, it doesn’t impact your credit score in any way.
- Pre-approved credit offers: You might receive pre-approval offers from credit card companies, banks, or lenders. Even though they check your credit, it’s a soft inquiry because you didn’t apply for anything.
- Background checks by employers: Employers may check your credit as part of a background check before hiring you. However, this will not impact your score.
- Current lenders reviewing your credit: If a current lender or bank checks your credit to review your account, it’s considered a soft inquiry. For instance, your credit card company may do this if they’re considering raising your credit limit.
Why Soft Inquiries Are Different
Unlike hard inquiries, soft inquiries are considered a non-intrusive look at your credit report. Since they don’t suggest that you’re taking on new debt, they don’t raise any red flags for lenders. Therefore, they don’t affect your credit score at all.
How Credit Inquiries Impact Your Credit Health
Now that we know the difference between hard and soft inquiries, it’s important to understand how these inquiries fit into your overall credit health. While a single hard inquiry may have a small impact, multiple hard inquiries over a short period can signal potential trouble to lenders.
For example, if you apply for several credit cards or loans within a few months, your credit score could drop due to the accumulation of hard inquiries. This is because lenders may interpret this behavior as a sign that you’re in financial distress or more likely to default on debt.
How Many Inquiries Are Too Many?
The key is balance. A few hard inquiries in a year won’t do much harm to your credit score, but too many in a short period can have a larger, more lasting effect. Lenders typically like to see a consistent and stable credit history, rather than one that shows you’re frequently searching for new credit.
To keep your credit score in good shape, consider limiting your applications for new credit. If you don’t need a new credit card or loan, it’s better to hold off and avoid unnecessary hard inquiries. If you are planning on applying for a big loan (like a mortgage or auto loan), try to space out your applications to avoid having too many hard inquiries within a short window.
How to Minimize the Impact of Hard Inquiries
While you can’t completely avoid hard inquiries if you’re applying for new credit, there are a few strategies to minimize their impact:
- Space out your applications: Try not to apply for new credit too frequently. If you’re planning to apply for a major loan, try to space out other applications for credit cards or smaller loans.
- Use soft inquiry options when possible: If you want to check your credit score or get pre-approved for an offer, make sure it’s a soft inquiry. These won’t impact your credit score.
- Review your credit report regularly: You’re entitled to a free credit report from each of the three major credit bureaus once a year. This allows you to stay on top of your credit health and spot any discrepancies before they become a bigger issue.
- Dispute any inaccuracies: If you spot any inaccurate hard inquiries on your credit report, you can dispute them with the credit bureau. This can help remove any inquiries that shouldn’t be there.
The Bottom Line
In short, hard inquiries may have a small impact on your credit score, but they don’t have to be a major concern if you manage your credit responsibly. Soft inquiries, on the other hand, have no impact on your score and can often be used as a tool to gauge your credit health or pre-qualify for offers.
By understanding the difference between these two types of inquiries and being strategic about your credit applications, you can protect your credit score and avoid unnecessary damage. Remember, applying for new credit is a big decision, so take it slowly and wisely—your future self will thank you for it.
Staying informed and managing your credit carefully is essential for building long-term financial stability. Just as hard inquiries may signal to lenders that you’re seeking more credit, being mindful of these factors and understanding their impact will allow you to make smarter, more educated decisions when it comes to your credit health.