You may have heard that credit checks can hurt your credit score and that you should avoid them whenever possible. This widely held belief is only partly true.
In fact, credit checks are just another part of managing your money. In many situations, the only way to move forward is to pull your credit report and look at it.
It’s important to know that not every credit check has the same effect on your score.
What Is A Credit Inquiry?
A credit request, also called a credit check or credit pull, is when a company gets a copy of your credit report and looks at it.
Your credit report is a summary of your consumer financial record. It usually shows how well you’ve paid back loans and how much debt you have compared to how much money you make.
Why should I let someone look at my credit?
Credit checks happen for many reasons, but their main purpose is to give a lender, landlord, or even a possible employer a better idea of who you are and how reliable you are based on your credit history and credit score.
No matter how good your credit is, it’s normal to feel nervous when someone checks it. But it has to happen, just like getting your teeth checked.
Because of this, it’s important to know the different kinds of credit questions, when they might happen, and how to make sure they don’t have a big effect on your credit score.
Soft Credit Checks Vs. Hard Credit Checks
There are two main kinds of credit checks: soft checks and hard checks.
Both types of credit checks work the same way and serve the same purpose, but which one is done depends on why your credit is being checked in the first place.
What is a soft credit check?
The most popular type of credit check is a soft credit check. They happen often and can be done with little knowledge. Soft credit checks can happen even when you don’t know about them.
The most important thing to know about a soft credit check is that it has no effect on your credit score at all. You won’t lose any points, no matter how many soft pulls happen.
This is because soft credit checks are usually used when there is less risk. For example, if you don’t want to borrow money or start a new credit line, you probably don’t need a hard pull.
What’s the difference between a soft credit check and a hard credit check?
It’s important to know that your credit report has the same information whether your credit is checked hard or soft. A hard check doesn’t give people who are looking at your credit any new information.
So, what’s the difference between the two if they both do the same thing?
A hard credit check, which is different from a soft check, does affect your credit score. A single question could lower your score for a short time by a few points. To be clear, it won’t ruin your credit history, but too many hard credit checks can start to wear it down.
Why does a hard search of your credit hurt your score?
Too many hard questions, especially in a short amount of time, could mean that you are taking on more than you can handle. For example, the more credit cards you get and the more money you borrow, the more of a risk you are as a borrower in the eyes of a bank.
Rate shopping is the only thing that isn’t like this. For example, if you want to shop around for the best interest rate on a mortgage or car loan, you won’t be held responsible for running credit checks with multiple lenders. As long as you apply for the same type of loan within 30 days, each search should only count as one hard credit check.
This doesn’t mean that you should always avoid hard pulls. Hard pulls are sometimes necessary if you want to buy a house, pay for college with student loans, or pay off risky credit card debt with a personal loan.
The key is to limit the number of hard pulls on your credit score and try to avoid them while you’re trying to build it up. Once your credit is in good shape, you can easily make up the few points you lost because of the hard search.
How Do I Know If It’s A Soft Or Hard Credit Pull?
You have to ask the company that is pulling your credit to find out if you will get a soft or hard check.
Most companies have a warning that says whether or not the credit check will affect your score. If you want to be sure, you can also contact customer service.
Some credit card companies, for example, only need a “soft pull,” while some bank accounts might require a “hard inquiry.” Even though starting a savings account usually has no effect on your credit score.
After your credit report has been pulled, you can look at it. There will be hard questions, but not soft ones.
It’s always a good idea to look into a hard pull that you don’t think should be on your report. This could be a sign of identity theft or an error made by a banking company.
When do “soft checks” of your credit happen?
As part of a background check, a possible boss or landlord might do a “soft pull.” When you open a new bank account, you can also expect one.
If you’ve ever been pre-approved for a loan or credit card, you’ve already had a soft check run on your credit without even knowing it. Credit card companies look at your credit report, figure out what kind of deal they can give you, and send it to you.
Reviewing your own credit report on free credit report sites is also called a “soft pull,” so you don’t have to worry about your credit score going down if you keep an eye on it.
If you have a very good credit score (above 740 points), you are more likely to get all kinds of loan offers and premium credit card choices. Keep in mind, though, that premium cards usually have big yearly fees, and almost all loans have high-interest fees.
What Information Is Reviewed In A Soft Credit Check?
Your credit report is a summary of all of your financial activities. Companies can see your payment records, available credit limits, how much credit you’re using, outstanding loans, and available balances.
All of these things, as well as the length of your credit history as a whole, affect your FICO score, which is also known as your credit score.
Your credit score is always changing, and it can go up or down based on how you handle your money. Here’s how they figured it out:
Payment History: Your payment history is usually the most important part of your credit record. Lenders want to know that you’ve always paid your bills on time in the past. Your credit score can go up over time if you make payments on time and don’t miss any. It can go down if you miss or pay late a lot.
Accounts Owed: This is the total amount of money you owe. It includes loan sums and how much you’ve used your credit cards.
Length of Credit History: The longer you’ve shown that you can keep your credit in good shape, the better your score will be.
Credit Mix: Your credit mix is how the different kinds of credit you have now are spread out. It’s usually best to have more than one type of loan, like a credit card, a car loan, and a home. If you only have credit cards and nothing else, it could be a sign that something is wrong and hurt your credit.
New Credit: Any recently started credit accounts are considered “new credit,” and this is where inquiries come in. If you open too many hard-pull accounts in a short amount of time, your credit score will go down.
Credit brokers put together your credit information and sell it to companies in the form of a credit report.
Experian, Equifax, and Transunion are the three biggest credit companies in the United States. Most companies use all three, but some may only use one or two. This means that your score could be slightly different based on which bureau is used.
Can Soft Credit Checks Help My Credit Score?
When your credit is being checked, you should do everything you can to make sure it’s in good shape.
Think of your credit report as a dating app page. When lenders or credit card companies look at your credit report, the more red flags they see, like late payments, high credit utilization, or too many hard questions, the less likely they are to give you money or a credit card.
If your credit report shows that you’ve always had good credit, it’s more likely that you’ll be approved and get good interest rates.
Building good credit is an important part of personal finance and can save you a lot of money over time.
Benefits of a Soft Credit Check
Simply put, having a high score gives you more choices, like being able to get better credit cards or borrow more money when you need to.
Soft credit checks help you out in this situation. Since soft checks don’t hurt your credit score, you can use them to build your credit over time.
Here are a few things you can do with the help of soft credit checks:
- They let you look at your credit report so you can see where you’re doing well and where you could do better. This is very important if you want to build your credit.
- Find out if you are already qualified for credit cards or loans. Your score can go up if you have a bigger credit limit and always pay on time.
- For a new job, check your past. Your credit score won’t go up just because you got a new job, but having more freedom with your money is a big part of building credit.
- Start a business by getting a business bank account.
- Find out if you can rent a room.
Check your credit records to make sure that there haven’t been any wrong or fraudulent hard inquiries.
Regularly check your credit
I think you should keep an eye on your checking account on a daily basis. Identity theft can quickly hurt your credit score. Checking your credit record and bank accounts often for problems is a good idea.
Overall, you should think of a soft credit check as a useful tool that you can use in your financial life. When used right, soft credit checks help you move forward while keeping an eye on anything that could set you back.
You can always get a copy of your credit record and look at it. Credit Karma is a famous site that gives out free credit scores.
It takes time to build up good credit, but now that you know how soft credit checks work, you’re already on the right path.