iQuanti: When you apply for a loan, credit, or another type of financing, you may have to undergo a credit check. Sometimes referred to as a credit inquiry, this is the process of a financial institution checking your history to see if you’re worth lending to. What you might now know is that there are two types: soft and hard credit checks. Let’s dive deeper into soft vs. hard credit checks, how they work, and what they show lenders.
What are soft credit checks?
A soft credit check, or soft pull, is a surface-level credit check that provides a snapshot of your finances to lenders. Oftentimes, soft credit checks are linked to a general background report. When you go online to check your credit score, the number you get is based on a soft inquiry rather than a hard pull.
If a lender were to make a prequalification offer, they would do so based on information gathered during a soft credit check. A soft inquiry does not require an actual report from the credit bureaus, which means it does not ding your credit score.
Here are some common types of soft credit checks:
- Checking your own credit score
- A component of a background check
- Loan prequalification and preapprovals
What are hard credit checks?
With a hard credit check, a lender is asking for an official report of your credit history. This is a deeper dive into things like your current debts, payment history, and previous credit inquiries. Hard credit checks are more thorough and can cause your score to drop by a few points. The minor drop in credit card points can quickly bounce back, especially if your application is approved. But keep in mind that too many hard credit pulls can harm your credit score.
Here are some types of hard credit checks:
- Rental applications
- Mortgage applications
- Personal loan applications
How to prevent hard inquiries from hurting your credit
If you’re worried about your credit score following a hard inquiry, rest assured the occasional hard inquiry won’t harm your score. However, if you have back-to-back hard inquiries (usually from more than one application in a short amount of time), you’re likely to experience a greater score dip. Try spacing out applications to one or two a year where possible. Too many of these signal that you’re in poor financial standing and relying on credit cards or loans to get by.
Avoid submitting applications to lenders without first checking your own score via a soft inquiry. By running a soft credit check, you can verify whether you’re in a good place for a hard credit check and better understand your chances of approval. It’s also recommended that you do hard credit checks periodically for an in-depth look at your finances. Usually, an annual hard credit check will suffice.
The bottom line
It’s important to know the difference between soft credit checks and hard credit checks. Each of these plays a special role in your overall financial well-being. By recognizing the difference, you know which to turn to for general monitoring and which to leave to the professionals when the time comes to apply for a loan.