You probably think that a credit look-up is a credit look-up, right? You aren’t alone; most people think that. But there are actually two different ways that lenders can pull your credit – they can do a soft inquiry or a hard inquiry. Each type affects your credit score differently.
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What is a Soft Inquiry?
A soft inquiry really isn’t an inquiry. While the lender or person pulling your credit does see your financial information, they aren’t doing so to make a financial decision about you. The most common situations when you may experience a soft inquiry include:
- Potential employers that want to see your financial habits
- Insurance companies that may want to provide you with coverage
- Credit card companies or banks that want to send you a pre-approved offer
- You check your own credit score
Each of these situations won’t result in a new loan, which is why they are called soft inquiries. They are soft because no one else sees them. If you pull your own credit, you may see it, but future lenders don’t see soft inquiries.
Do Soft Inquiries Hurt Your Credit Score?
Luckily, soft inquiries don’t affect your credit score. Because there’s no potential loan that will happen at the end of the process, the credit bureaus don’t include soft inquiries in their credit score algorithms. In other words, you don’t have to worry about a soft inquiry damaging your credit score.
What is a Hard Inquiry?
A hard inquiry is a different story. When you apply for new credit with a bank, mortgage company, or credit card company, the lender needs to make a lending decision. They pull your credit to decide if you are a good candidate for the loan you asked to receive.
Unlike soft inquiries, future lenders can see your hard inquiries. They stay on your credit report for two years. This means that any lenders that pull your credit for the next two years will see that inquiry. While it’s not the end of the world to see other inquiries, it’s definitely reason to only apply for loans or credit cards that you really need.
Do Hard Inquiries Affect Your Credit Report?
Hard inquiries also affect your credit score. Typically, each hard inquiry costs you five points on your credit score. You only get hit one time for the inquiry, but then, as we said above, the inquiry stays on your credit report.
There is an exception to the rule, though. The credit bureaus recognize when someone is rate shopping. Let’s say that you apply for a mortgage with three lenders. All three lenders have to pull your credit in order to make a lending decision. If you apply for those loans within a short time, say 2 to 3 weeks, the credit bureau may treat it as one inquiry. In other words, you only lose 5 points on your credit score rather than 5 points per inquiry.
The exception to the rule only applies to inquiries that are within the same industry (ex: mortgage) and within a short amount of time. If you shop for a mortgage today and then don’t comparison shop with another lender for another month, chances are that you’d be hit with two inquiries because it’s hard to say that you were comparison shopping with the dates so spread out like that.
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How to Limit Your Credit Inquiries
Technically, you are in charge of your credit inquiries. While you may have more soft inquiries than you desire, you definitely control the number of hard inquiries on your credit report. So how do you control them? Use the following tips:
- Don’t apply for credit just because it looks attractive. Stop and think whether you really need the credit. Just because you received an attractive credit card offer in the mail doesn’t mean you have to apply for it. Do you really need the credit line? If you don’t, it’s best not to apply.
- Make sure all inquiries on your credit report are legitimate. Human error occurs all of the time on credit reports. It’s up to you to check your credit report periodically and make sure the inquiries are real. If you find a mistake, report it and ask for it to be corrected.
- Make sure to comparison shop with several lenders for loans within a short amount of time. In other words, be prepared when you apply for your first loan. Know what you want and what you need. Then do your shopping quickly.
- Wait a while after you have a new inquiry to apply for any other new loans. Lenders look to see how recently you applied for a new loan. Even if the inquiry didn’t result in a new loan, lenders will wonder. Waiting at least a few months, or even a year before applying for new debt will hurt your credit score the least.
The different types of credit inquiries do affect your credit score differently. Soft inquiries don’t affect your credit score in most cases. Hard inquiries do affect it, but you can manage how they affect your score by keeping careful track of what you apply for and when.