Credit check, also known as credit inquiries or credit pulls, is the process of requesting a copy of an individual’s credit report from a credit bureau. There are many situations in which someone may request your credit report. Lenders perform a credit check before approving you for a mortgage or loan, a landlord may run a credit check on you before renting their house to you, and you may request your own credit report from time to time to stay up to date about your credit situation. A credit report reveals information regarding your debt, your payment history, and other crucial information that can reveal your financial health.
However, not all credit checks are the same, and not all of them affect your credit scores. Different credit checks have different effects on your credit, and not all credit checks affect your credit score. There are two types of credit checks based on the purpose of inquiry — hard credit checks, and soft credit checks, both of which are discussed below.
When any kind of financial institution conducts a credit check on someone before making a lending decision, the credit check is called a hard credit check. When you apply for a mortgage, any kind of loan, or even a new credit card, the credit inquiry made by the lender or bank will be recorded on your credit file and would be visible to anyone who checks your credit report.
Lenders check your credit history thoroughly before approving your credit applications. A hard inquiry results in a detailed credit report that shows how you have handled your credit over the years. The report gives information about how much debt you have, how many times your payments have been late, past bankruptcy declarations, derogatory remarks, and other details that help them decide your creditworthiness. Having a good credit score can do you many favors; for example, individuals with a good credit score can get better mortgage rates compared to those with bad credit.
Generally, hard inquiries remain on your credit file for up to two years and may lower your credit score by a few points. Hard inquiries are factored into your credit score because when you are applying for more credit, there is a higher risk of you not being able to repay your current debt. However, the drop in the credit score is temporary, and you will see your credit score bounce back in no time if you keep making your payments on time.
While having one or two hard inquiries on your credit file is not a problem, having multiple hard inquiries in a short span of time suggests that you might be under financial stress or trying to take a lot of debt. Lenders generally perceive such individuals as risky and are hesitant to extend credit to them. Therefore, it is ideal to refrain from applying for too many credit products in a short timeframe.
When you are looking for a mortgage, car loan, or any other specific loan, you may approach multiple lenders or shop around for the best deal. All of these lenders will typically perform a credit check on you to examine your creditworthiness. In such a scenario, instead of registering multiple hard inquiries on your credit file, the credit bureaus will register a single hard inquiry. However, you need to be cognizant of the timeframe, as the credit bureaus generally allow a timeframe of 14 - 45 days for multiple inquiries to be counted as one. It is therefore recommended to get all the credit checks done within two weeks rather than keeping a gap between them.
It should also be noted that this rule does not apply to credit card applications, and each hard inquiry pertaining to your credit card applications will be registered separately on your credit file.
Another key fact about hard inquiries is that such inquiries typically need your authorization. Unlike soft inquiries, hard inquiries cannot be conducted without your permission. If you see an unauthorized hard inquiry on your credit report, you may dispute it with the credit bureau. An unauthorized credit check might be an indicator of identity theft and must be taken seriously.
Soft credit checks are usually a part of a background check or are conducted to pre-approve someone for financing offers. Even when you request your own credit report, the inquiry is registered as a soft credit check. Soft credit checks do not affect your credit score and do not have an impact on your approval for credit products. Soft credit checks are not visible to lenders reviewing your credit profile. Only you can view these credit checks on your credit report when you request one.
Many people have a misconception that checking their credit score would lower it. On the contrary, it is advisable to monitor your credit score regularly to understand your credit situation better and detect any inaccuracies on your credit file. If you find that your credit score is low, you can take several steps to improve your credit score.
Unlike hard credit checks, soft credit checks may be conducted without your permission. For example, your financial institution may run a credit check on you to pre-qualify you for a credit card offer, or a potential employer may run a credit check when you apply for a job.
Hard credit checks usually occur when you apply for some kind of credit and authorize the lender to conduct a credit check. A hard inquiry occurs when you apply for:
If you did not authorize a credit check, it must be reported as a soft inquiry on your credit report. A soft inquiry may appear on your credit report when:
Apart from the above-listed examples, there may be many other situations when a hard or soft credit check may be reported on your credit report. You can talk to the credit bureaus about how a particular kind of inquiry would be reported on your credit file.
Hard credit inquiries affect your credit score and are officially recorded on your credit file. Listed below are some steps you can take to limit the effects of hard credit inquiries:
No. Your credit score is not affected when you check it. When you request your credit report, the inquiry is classified as a soft inquiry, which does not lower your credit score. In fact, it is recommended that you monitor your credit score regularly to keep track of your credit situation and uncover any inaccuracies in your credit report. Monitoring your credit can also help you prepare to apply for a loan.
Usually, a hard credit check lowers your credit score by about five points. However, the drop is temporary, and you may see your credit score increase again within a few months. The drop in credit score usually doesn’t last more than 12 months. Some hard credit checks may not reduce your credit score.
No, soft credit checks do not affect credit scores. Soft credit checks are not officially recorded on your credit file and do not impact credit scores.
A soft credit check provides an outline of your credit situation, including your loans, lines of credit, payment history, information about late payments, and any derogatory remarks on your credit file.
If you find a hard inquiry on your credit report that you did not authorize, you should immediately contact the lender that conducted it. If the inquiry was made by mistake, you can ask the lender to inform the credit bureaus about the same.
You can also dispute an inquiry by filling out a dispute form provided by the credit bureaus. After you fill out the form, the bureau investigates the matter. If they find that inquiry was unauthorized, the inquiry will be removed from your file.
Technically, you can’t fail a soft credit check because you aren’t applying for credit when such a check is conducted. However, if the reviewer is not satisfied with the information on your credit report, you may lose out on some opportunities. For example, a potential employer might disqualify your job application based on your credit report, or a landlord may reject your rental application if they find your credit history problematic.
Generally, hard inquiries stay on your credit file for 12 to 24 months; however, the effect of the hard inquiry on your credit score usually stays for less than a year.
While both hard and soft credit inquiries provide information about your credit, both have different effects on your credit score. A soft pull does not affect your credit score, but a hard pull may lower your credit temporarily. It is always a good idea to check your credit score routinely and maintain a good credit score. A key rule to follow is to avoid making too many credit applications in a short period of time, as it can record several hard inquiries on your credit report, This could make you look risky and result in the rejection of your credit applications.