Credit reports are not just meant to list out all of your accomplishments and failures with credit. They’re usable, most notably by lenders, credit card issuers, and other companies to determine how responsible you are as a consumer. When any one party wants a peek into your credit history, they go through a formal inquiry process, which can be broken down into hard and soft inquiries. From the consumer’s point of view, soft inquiries are far more beneficial, as they’re easier on your credit score.
How Do Soft Inquiries Work?
Soft inquiries are also known as soft credit checks, soft credit pulls, or soft credit inquiries. They happen when you or someone that you have authorized runs a credit check for a reason that is not related to approving a new credit application and lending you money. Common uses of soft pulls include:
- You check your own credit report
- A potential employer or utility company checks your report before approving your application
- A current creditor checks your report for updates
- A credit card issuer, mortgage lender, or other company checks your report to see if you are eligible for pre-approval offers
Once you’ve authorized the party to make a soft pull of your credit report, or you decide to make one of your own, the authorized individual or company must contact one of the three credit bureaus — Equifax, Experian, or TransUnion — to obtain a copy of your credit report.
How Do Companies Use Soft Inquiries?
Companies and lenders use the information in your credit report to determine whether you qualify for pre-approval on loans, credit cards, and special promotions or interest rates. They take note of some of the most important aspects of your credit report, including your payment history, credit utilization, and the length of your credit history among other things to assess how responsible and reliable you are with managing your credit.
In some instances, it can be unclear whether the individual or company will conduct a soft inquiry or hard inquiry when checking your credit. For instance, some leasing companies and banks do hard inquiries before approving you for a lease or bank account. Since hard inquiries can cause your credit score to decrease, it’s always important to ask which type of inquiry they will run.
How Can You Use a Soft Inquiry?
Under the Fair Credit Reporting Act, you are legally entitled to one free credit report every 12 months. Keep in mind that there are three credit bureaus, each with their own credit report, meaning that you can request one copy from each bureau every year. The request will show up as a soft inquiry only on the report of the credit bureau from which you requested it.
For example, if you do a soft inquiry on your Equifax credit report, the inquiry will only show up on your Equifax report. You could then also do a soft inquiry for both Experian and TransUnion reports.
It is important to take advantage of these free annual credit checks for a number of reasons. One important reason to check your credit score is to ensure that no incorrect, fraudulent, or outdated information has made its way into your report. By catching these mistakes early, you can avoid serious damage to your credit score.
You should also check your credit report and scores to get a better understanding of what lenders, credit card companies, potential employers, utility companies, landlords, and other companies see when running a credit check. This can help you assess in what areas you are excelling, whether you are doing a great job of paying bills on time or maintaining a positive credit utilization.
Just as importantly, you can see in what areas you need to improve. Perhaps you’ve applied for a number of new credit accounts recently and it’s hurting your score. By checking your report, you are able to more proactively make adjustments to your credit usage to set yourself up for success with your personal finances.
Do Soft Inquiries Impact Your Credit Score?
No, soft inquiries do not impact your credit score; however, they will still appear on your credit report. Since a soft pull is made by a company to pre-approve you for an offer or to check your credit for a reason other than lending you money, credit scoring agencies do not hold these against you when applying your information to their credit scoring models.
Difference Between Soft Inquiry and Hard Inquiry
Soft inquiries apply when you are looking for approval (or pre-approval) on things other than loans or credit cards. Hard inquiries, on the other hand, are used when a lender or credit card company requests a copy of your credit report in order to approve a credit application. Unfortunately, hard inquiries will always appear on your credit report and negatively impact your score, even if you are not approved for the loan or credit card.
Common uses for hard inquiries include credit cards, mortgages, auto loans, personal loans, lines of credit, and other types of credit.
As a borrower, you are a risk to the lender or credit card company that you are borrowing from. Lenders conduct hard inquiries, which temporarily decrease your credit score, in order to reflect that risk. Hard inquiries will remain on your credit report for a maximum of two years, but in most cases you will only see it impact your score for a few months as long as you make on-time payments and keep your credit utilization in check.
Luckily, if you are rate shopping, or applying for credit cards or loans in order to compare interest rates and other terms, you will not be penalized for each application that you submit. While each credit card company will run a hard inquiry, your credit score will not decrease each time as long as you keep your rate shopping to a relatively short window of time.
Should You Worry About Soft Inquiries?
No, you do not need to worry about soft inquiries given they do not upset your credit score. However, it is always best to check with the company that you are working with to confirm if they will be inquiring on your report and whether they will do a hard or soft credit check.