A deep dive into the how credit checks can impact your financial health
Credit checks are an inevitable part of navigating the world of personal finance. Whether you are applying for a new credit card, seeking a loan, or shopping for insurance, companies want to know if you are a responsible borrower. If some cases, they may only skim the surface of your credit background — which is called a soft check. But if you apply for a mortgage or an automobile loan, you can expect the lender to conduct a full scale — or hard check — into your credit history.
Either one will provide lenders with insights into your creditworthiness, yet they will have different impacts on your credit score. Keep reading to learn about the distinctions between these two credit inquiries and how you can manage them to maintain a healthy credit profile.
Soft Checks: An informal and harmless inquiry
A soft check (like we do here at Symple Lending), also known as soft inquiry or soft pull, occurs when a financial institution reviews your credit history without initiating a full-scale formal credit application. These are some instances in which a company may conduct a soft check:
Pre-approval offers: Lending institutions may perform a soft check to determine your eligibility for credit card offers, personal loans, or a mortgage. You may have received such offers in your mailbox. These are typically unsolicited and are intended to earn your business. These offers provide you with an estimate of what your payment would be on a particular loan.
Background checks: Employers, landlords, or insurance companies make up another group that have a vested interest in knowing about your character and payment history. Thus, they may conduct a soft check as part of their background verification process.
Personal credit reviews: No doubt you’ve heard about credit bureaus and credit scores. But what are they and why do they matter? The three major credit bureaus, Equifax, Experian, and TransUnion collect and analyze data on consumers’ credit behavior. They often sell information to companies that want to know which consumers would be low-risk borrowers. These activities fall into the soft inquiry category.
The good news: they have no impact on your credit score; potential lenders will not have visibility into who else performed a soft check; it will be displayed on your personal credit report merely for reference.
Hard Checks: These will leave their footprint
Consider this scenario. You’ve been kicking the tires on a new automobile or have been sizing up that home of your dreams. Or perhaps your television is graveyard bound and you need to apply for a credit card. These situations are lumped into the hard check categories. When you make a formal application, a potential lender gains access to your full credit report. They pull back the curtain and take a good look at your credit history, payment habits, and debt-to-income ratio. Below are a few reasons why these may occur:
Applying for a new credit card
Seeking a line of credit increase
Opening a new utility or mobile phone account
The primary concern is that they can negatively affect your credit score, so you would be wise not to allow these to occur too often. Otherwise, it would trigger negative changes to credit scoring models, such as FICO and VantageScore, causing your rating to drop several points. Alternatively, a single hard inquiry would only cause your score to lose a few points.
Over time, negative credit scores can disappear, leaving you more creditworthy. Hard inquiries remain on your credit report for two years, and their detrimental impact to your score decreases after about 12 months.
Strategies for Managing Credit Inquiries
While hard checks may be mandatory for securing credit or essential services, there are strategies you can employ to minimize their impact:
Space out your credit applications: Applying for multiple credit products within a short timeframe can signal to lenders that you are experiencing financial difficulties. It’s wise to put some space between credit applications — perhaps several months — especially if they involve hard inquiries.
Be selective about credit products: Avoid applying for credit cards or loans that aren’t necessary, as each application activates a hard inquiry. Instead, obtain only financial products that suit your specific requirements and financial goals.
Utilize pre-qualification tools: Many lenders offer pre-qualification services that allow you to determine your likelihood of approval without initiating a hard inquiry. It can also help you identify the most suitable credit products.
Rate shopping: Credit scoring models understand that mortgage or auto loan shoppers will want to compare offers. As a result, multiple hard inquiries for the same type of loan within a specific timeframe (usually 14 to 45 days, depending on the scoring model) are treated as a single inquiry for scoring purposes. Be sure to complete your rate shopping promptly to minimize any impact to your credit score.
Monitor your credit report: Identity theft and fraud are real. And banks can occasionally make errors. Therefore, make it a habit of regularly reviewing your credit report for errors and discrepancies. Ensure that all hard inquiries listed in your report are accurate and dispute any unauthorized inquiries with the credit bureau.
Outsmart Scammers: One free and excellent way to protect your credit is to ask the bureaus to freeze your credit. When you are ready to apply for credit, you simply ask them to unfreeze it. This action will not have any negative impact on your credit.
As you navigate the world of personal finance, it is crucial to remember that credit inquiries are only one facet of your overall creditworthiness. Maintaining a strong credit score requires a combination of responsible borrowing, making timely payments, and sensibly managing your debt. Knowledge is power; by staying informed and adopting responsible financial habits, you can pave the way for long-term financial success.
At Symple Lending we perform a soft check only to help determine eligibility.
If you are looking to get out from under the never-ending cycle of high interest rate credit card debt, give us a call today and we can see how a personal loan can help accomplish your goals! +1 866–832–3685