Credit

Do Soft Credit Checks Affect Credit?

If you want to inquire with lenders or credit card companies, know that you may have to go through a credit check. But do soft credit checks affect credit? Learn what happens to your credit score when you submit a loan application below. 

Soft vs. Hard Credit Check: What’s the Difference?

It’s essential for consumers to know the difference between soft and hard credit inquiries. Understanding how a credit inquiry affects your credit score can help you make fully informed financial decisions. 

A Soft Credit Check

Soft credit checks, also known as soft inquiries, occur when you or an authorized party checks your credit report as part of a background check. For example, you can expect to undergo a soft credit pull when you inquire about fast cash loans online to see if you qualify for pre-approval. 

Soft credit inquiries do not affect your credit score because you are inquiring for information and not submitting a loan application. A soft credit check does not typically appear on your credit report. Still, in some instances, a credit bureau may record the inquiry.  

A Hard Credit Check

A hard credit check, or hard credit pull, is done when you submit an application for a new credit card, loan, or mortgage. A hard inquiry allows the financial institution to view your credit reports and make an approval decision. 

Unlike soft credit inquiries, hard credit inquiries do lower your credit score. Each hard inquiry can decrease your score by as much as five points. Multiple hard inquiries within a short period can severely affect your FICO score. In addition, your credit history may brand you as a high-risk borrower.     

How Long Does a Credit Check Stay on a Credit Report?

Hard inquiries do affect credit scores and appear on credit reports. And while soft inquiries don’t affect credit, they may appear on your credit reports. So how long are hard and soft credit inquiries visible to lenders? 

Hard credit inquiries will remain on your credit report for up to two years. The credit bureau will remove the hard credit check from your credit report after those two years. However, hard inquiries will only affect your credit score for a few months afterward—up to one year. If you undergo multiple inquiries within a short period, the damage to your credit will be more significant.

A soft inquiry does not usually appear on a credit report. If you notice a soft inquiry on your credit report, rest easy knowing that your credit score will not change as a result. You can expect soft inquiries to disappear from a credit report within two years. 

What if There Is an Inaccurate Inquiry on My Credit Report?

While you cannot remove accurate credit checks from your credit reports, you can dispute inaccurate information. The three major credit bureaus provide consumers with one free credit report annually. Visit the Annual Credit Report website or call (877) 322-8228 to get your free credit reports every twelve months.   

If you notice an unusual inquiry you did not authorize, know that you can correct errors on your credit report. To file a dispute with one of the three credit bureaus, you can do one of the following:

  • Call Equifax (800-864-2978), Experian (888-397-3742), or TransUnion (800-916-8800).
  • Mail a detailed letter or dispute form to the credit reporting agency.
  • Submit a dispute form online through the credit bureaus’ website. 

The credit bureau with the error will conduct an investigation, and you can typically expect a response within 30 days. If the credit inquiry is an error, the credit bureau will promptly remove the inaccurate information.       

Is It Bad To Check My Credit Score or Credit Reports?

Reviewing your own credit report and score does not affect your credit because that is a soft inquiry. You can continuously check your financial information without negatively affecting your credit history!

Financial experts advise consumers to check their own credit scores and reports at least once a year. Checking your credit reports often ensures that your information is accurate and that there are no fraudulent accounts in your name. You may be a victim of identity theft if you notice unusual or suspicious information on one of your credit reports.     

What Information Do Lenders See on My Credit Reports? 

While hard and soft inquiries affect your credit differently, they provide the same information. When you authorize credit checks, you allow visibility of your credit reports. Credit reports are detailed summaries of your financial activities. 

There are three major credit bureaus: Equifax, Experian, and TransUnion. Each credit bureau keeps a record of your financial information and provides it to lenders, employers, insurance providers, landlords, etc. However, the Fair Credit Reporting Act (FCRA) requires businesses to have a “permissible purpose” to view a consumer’s credit report. This ensures that companies cannot access your personal information without a valid purpose. But what personal information can you see on a credit report? 

Personal Information

Your credit reports will all have basic personal information about you, such as your name, birth date, current, and past residential addresses, phone numbers, and Social Security Number (SSN). Suppose you have ever listed an employer on a credit application. In that case, that information will also be visible on your credit reports.  

Financial Accounts

Your current and past financial accounts can be seen on your credit report. If you have closed loan or credit card accounts from the past ten years, they may still appear on your report. Each account will have a corresponding date and status, such as open, closed, or past due. 

When a lender checks your report, they can also view your payment history for each account. Your payment history is crucial, as it directly affects your credit score and eligibility for funding. You can improve your payment history on your credit report by setting up automatic payments or bill reminders. One missed payment may not affect your credit score by a lot of points, but multiple late payments can drastically decrease your FICO score and cost you a lot of late fees.         

Credit Inquiries

Hard and soft inquiries will appear and remain on your credit report for up to two years. Lenders and credit card issuers can view the company that pulled your information and the date of the inquiry.   

Public Records

Your public records can also be visible on your credit reports. Public records include bankruptcies, liens, and foreclosures. Most negative financial information will remain on your credit reports for up to seven years, although the adverse effects on your credit score lessen with time.      

What Other Financial Activities Affect Credit Scores?

Hard inquiries affect your credit by a few points, but what other financial activities cause your credit to dip? Credit scores depend on credit scoring models, such as VantageScore and FICO. A credit scoring model is an algorithm that calculates your level of financial risk based on various factors. For example, FICO uses five factors to make up your credit score.  

Factor 1: Your Payment History 

Your payment history is the most important determining factor that affects your credit score. Payment history counts for 35% of your total FICO score. If you continuously pay your bills on time, you can expect to have a good credit rating or higher. Late payments can decrease your score and appear on your credit reports, so ensure you set up reminders or alerts to avoid missed due dates. 

Factor 2: Your Total Debt

The amount of debt you carry is the second most important factor for credit score calculations. Your total debt affects your credit by 30%. Almost every consumer has outstanding credit card debt, so having debt is not abnormal. However, debt becomes an issue when you use more than 30% of your available credit. Credit utilization is the difference between your total debt and your total credit limit. If you aim to build good credit, it’s crucial to lower the amount of debt you carry.   

Factor 3: Length of Your Credit History 

The length of a consumer’s credit history counts for 15% of a credit score. Your credit history is the only factor you cannot actively fix. But ideally, you should leave financial accounts open, even if you don’t use them. Keeping old accounts open can help you get a longer average credit history. Credit scoring models favor long-standing accounts because they prove you can successfully manage your finances.   

Factor 4: New Credit Inquiries

The number of hard inquiries you make within one year affects your credit by 10%. Every hard credit inquiry you make lowers your credit score. However, there are exceptions! Most credit scoring models only count one inquiry if you apply for multiple mortgages, auto loans, or student loans. For example, suppose you want an auto loan and apply with multiple lenders within a 14 to 45-day period to compare offers. In that case, you will only see one hard inquiry on your credit report!  

Factor 5: Credit Mix 

The type of financial accounts you have counts for 10% of your credit score. Responsibly managing a mix of revolving and installment credit can improve your credit rating. However, a credit mix is unnecessary for building a good credit score.

The Bottom Line: Soft Credit Checks

Soft credit checks do not affect credit, but hard credit checks do. When you check your credit score or inquire about a pre-approval estimate, your score remains the same. But when you attach a loan application to an inquiry for emergency funding, you allow the financial institution to make a qualifying decision based on your credit history. An official lending decision by a lender will decrease your credit score by a few points and remain on your credit report for up to two years. 

The number of hard credit inquiries you make within one year counts for 10% of your credit score. Financial experts advise consumers to avoid making more than six hard inquiries within a year. Too many inquiries within a short period can severely decrease your FICO score and damage your credit history. 

If you are interested in applying for a new loan or credit card, search for lenders that provide a pre-approval estimate. A pre-qualifying decision is made using a soft credit check, which does not alter your credit score. Soft credit inquiries allow consumers to compare multiple loan offers without affecting credit scores.

 

References:
How Long Do Hard Inquiries Stay on Your Credit Report?│Experian
Here’s what information appears on your credit report │CNBC