The difference between hard and soft credit inquiries
When it comes to applying for credit, you may have heard the terms "hard inquiry" and "soft inquiry" thrown around. But do you know the difference between the two? Understanding the difference between hard and soft credit inquiries is crucial for maintaining a healthy credit score and ensuring that your credit report remains accurate. In this article, we'll break down the differences between the two types of inquiries so that you can make informed decisions when it comes to applying for credit.
What is a credit inquiry?
Before we dive into the differences between hard and soft credit inquiries, it's important to understand what a credit inquiry is. A credit inquiry is a request by a lender or creditor to access your credit report. There are two types of credit inquiries: hard inquiries and soft inquiries.
What is a hard credit inquiry?
A hard credit inquiry occurs when a lender or creditor checks your credit report as a result of your application for credit. Hard inquiries are the result of you applying for credit, and they typically appear on your credit report for up to two years. Examples of hard inquiries include applying for a credit card or loan, or applying to rent an apartment. Hard inquiries can temporarily lower your credit score, so it's important to only apply for credit when you really need it.
What is a soft credit inquiry?
A soft credit inquiry, on the other hand, occurs when your credit report is accessed for reasons other than applying for credit. Soft inquiries do not affect your credit score and do not appear on your credit report for more than two years. Examples of soft inquiries include checking your own credit score, pre-approvals for credit offers, and background checks by employers.
Why do hard inquiries affect your credit score?
Hard inquiries can cause a temporary drop in your credit score because they indicate that you're actively seeking new credit. Lenders and creditors view too many hard inquiries as a sign that you may be a high-risk borrower, as it suggests that you may be taking on more debt than you can handle. However, the impact of a hard inquiry on your credit score is typically small, and your score should bounce back within a few months if you continue to use credit responsibly.
How can you minimize the impact of hard inquiries on your credit score?
While hard inquiries are a normal part of the credit application process, there are steps you can take to minimize their impact on your credit score. First, only apply for credit when you really need it. Multiple hard inquiries in a short amount of time can have a bigger impact on your score, so avoid applying for credit for the sake of applying. Additionally, try to keep your credit applications spread out over time. Instead of applying for multiple credit cards at once, for example, apply for one at a time and wait a few months before applying for another.
What impact do soft inquiries have on your credit score?
Soft inquiries have no impact on your credit score. Because they're not associated with a credit application, they don't suggest that you're taking on new debt. In fact, checking your own credit score is a good habit to get into, as it allows you to monitor your credit report for accuracy and identity theft. Pre-approvals for credit offers, such as credit cards, can also be a helpful tool for learning more about your options before you make a decision.
How often should you check your credit report?
It's important to check your credit report regularly, regardless of whether you're actively seeking credit. By law, you're entitled to a free credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once per year. You can request your free report at AnnualCreditReport.com. Checking your credit report allows you to identify any errors or inaccuracies, which can negatively impact your credit score. Regularly monitoring your credit report can also alert you to potential identity theft or fraudulent activity.
In conclusion
Understanding the difference between hard and soft credit inquiries is important for maintaining a healthy credit score. While hard inquiries can temporarily lower your score, they're a normal part of the credit application process. By only applying for credit when you really need it and spacing out your credit applications, you can minimize the impact of hard inquiries on your score. Soft inquiries have no impact on your credit score, so there's no harm in checking your own credit report or accepting pre-approvals for credit offers. Regularly monitoring your credit report can also help to ensure its accuracy and prevent fraudulent activity.