Hard vs soft inquiries and their impact on your credit score
Everyone understands the importance of a high credit score. It is a representation of your financial well-being and can be the difference between getting a loan, a mortgage or a credit card and not getting one. There are lots of different factors that can impact your credit score including hard inquiries. What are hard inquiries and how do they impact your credit score? What is the difference between hard and soft inquiries?
Below, we will answer these and many more questions.
Your credit score
Your credit score is calculated using several different factors. These include credit card utilisation (one of the biggest factors), length of your credit score history, negative points in credit reports, and the percentage of your repayments that were done on time. How does a hard inquiry factor into all this?
Hard credit inquiries
A hard inquiry is usually instigated by a financial institution. These include lenders, banks, credit card insurers, and other similar institutions. They do these hard inquiries to determine if they can or cannot give you a new line of credit (a loan, credit card or mortgage).
What a lot of people do not know, however, is that a hard inquiry can lower your credit score by a few points. The good news is that a single hard inquiry is unlikely to tank your credit card and usually has no bearing on whether you get approved for a line of credit or not.
Because a single hard inquiry takes a few points off your credit score, you shouldn’t have too many of them done at the same time. For example, it would be detrimental to apply for a bunch of new credit cards all at the same time.
Soft credit inquiry
The conversation about hard vs soft credit inquiries is not complete without looking at the flip side: soft inquiries. These usually occur when a company or person looks at your credit score or information when doing a background check. This might be an employer who wants to hire you or a bank that wants to see if you qualify for a new credit card.
Soft credit inquiries are usually not connected to any new credit applications and, therefore:
- They do not impact your credit score and
- Can only be seen when you pull your personal credit reports.
Reporting on hard and soft inquiries
There is only one way of knowing when or if a company or lending institution is looking at your credit score – they will ask. Usually, when applying for new credit, the institution will ask you if they can look at your credit scores. If you accept, it will be logged as a hard inquiry. If you do not, it will be logged as a soft inquiry.
Remember to never give consent to any hard inquiries if you are not the one who instigated the lending or borrowing process, as you might see a drop in your credit score without realizing why.
Keeping your credit score up is the best way to show you are financially healthy. That said, you should always be careful about hard credit inquiries, as they can wreck your otherwise perfect credit score.