In personal finance, your credit report card grades your financial history. It’s a detailed record of your credit history that lenders, landlords, and even some employers use to assess your financial reliability. Not all peeks at your credit report are created equal. This brings up the concept of soft and hard credit pulls, two ways your credit information can be accessed and used.
Understanding the difference between soft and hard credit pulls is key to pursuing a good credit score and knowing how to navigate the waters regarding finances. Are you applying for a new card, seeking to shop for a mortgage, or simply curious as to what goes on with your personal credit? Knowing how this works will go a long way in helping you make appropriate decisions about your financial future.
In this detailed guide, we will take you deep inside the soft and hard pulls world. We will take a closer look at what they are, how they differ from one another, at what point they may occur, and, most importantly, how they influence your credit score. By reading this article, you will know more about these two credit checks and how to leverage that knowledge to your best advantage as you manage your credit health.
Let’s draw the curtain and demystify credit pulls, an important aspect of your financial life.
What Are Credit Pulls?
Let’s return to the basics before getting into the specifics of soft and hard pulls. What is a credit pull?
A credit pull, a credit inquiry, or a check is a request to view your credit report. This is a detailed report that contains your history relating to credit, including but not limited to:
- Payment history of loans and credit cards
- Amounts owed on various accounts
- Length of credit history
- Types of credit accounts open
- New credit opened recently
When one requests to view this information, it gets recorded on your credit report as an inquiry. Not all inquiries are equal, bringing us to the important difference between soft and hard credit pulls.
Soft Credit Pulls: The Gentle Touch
What is a Soft Credit Pull? Soft credit pulls are credit inquiries, or soft checks, that do not negatively mark your credit score. They’re like a light touch to your credit report that leaves no trace.
What is a Soft Credit Pull?
A soft pull is when a credit report is pulled for informational purposes only. This type of inquiry may not need your permission or even be associated with an application for new credit in any way.
When Does a Soft Pull Take Place?
Soft pulls take place for many reasons:
- When you check your credit: Accessing your own credit report or score is always a soft pull.
- Pre-approved credit offers: If companies send you pre-approved credit card or loan offers, most likely they did a soft pull.
- Background checks: Some employers may do a soft pull under a background investigation.
- Insurance quotes: While shopping for insurance, some companies do a soft pull to calculate your rate.
- Account reviews: Your current creditors may check your credit from time to time with a soft pull.
How Soft Pulls Affect Your Credit Score
The most important thing to know about soft pulls is that they don’t affect your credit score. You can have many soft pulls without adverse implications on your credit health.
Who Can See Soft Pulls?
You see these on your credit report when you view it, but they do not appear to lenders and other parties when the latter access your report. That, in turn, means they will not be the factor in deciding whether to grant you credit.
Hard Credit Pulls: The Heavier Touch
Hard credit pulls, otherwise known as hard inquiries or hard checks, are serious sorts of credit pulls. Aside from a soft pull, it can drop your credit score and remain on your credit report for up to two years.
What is a Hard Credit Pull?
Hard Pull: A hard pull occurs when a financial institution, typically a lender or credit card issuer, accesses your credit report in relation to a potential lending decision. Inquiries require your permission and are usually initiated through an application for new credit.
When Do Hard Pulls Occur?
Hard pulls include the following:
- Credit card applications: When someone applies for a new credit card.
- Loan applications: This category includes mortgages, auto loans, personal loans, and even student loans.
- Apartment rentals: Landlords may perform a hard pull on applicants.
- Utilities: Utility companies sometimes pull your credit when setting up new services.
- Cell phone contracts: If you initiate a new cellular plan and this involves financing a device.
How Hard Pulls Affect Your Credit Score
Hard pulls can harm your credit score, but generally, the effect is minor and temporary. Here’s what you want to know:
- A single hard inquiry tends to drop your FICO score by less than five points.
- The impact of a hard pull fades away with time.
- Though hard pulls remain in your credit report for two years, their influence on your score lasts only one year.
- Multiple pulls in a short duration have a snowball effect which might suggest you are a greater risk to the lender than what you really are.
Who Can See Hard Pulls?
Unlike soft pulls, hard pulls are visible to anyone who reviews your credit report. You, lenders, and other authorized parties may review your credit for various purposes.
The Key Differences: Soft vs. Hard Pulls in a Nutshell
To make it simpler to understand the key differences between soft and hard pulls, let us break them down side by side:
| Aspect | Soft Pulls | Hard Pulls |
|---|---|---|
| Affects credit score | Not at all | Slightly negative impact |
| Permission required | Not a requirement | Permission required |
| How long it stays on a credit report | Not visible | Yes, it’s visible |
| When this normally occurs | When one checks their credit or pre-approvals are made | When a new credit application is made |
| How long it stays on credit report | Not recorded | 2 years maximum participatory exercise. |
Understanding the difference between hard and soft pulls is important for various reasons enumerated below.
- Credit Score Management: You will ensure that at certain times, when your credit score is very important, you do not apply for new credit too often, as this would negatively impact your score due to hard pulls.
- Fraud Detection: If you observe hard pulls on your credit report that you did not request, it means that maybe someone is fraudulently using your identity.
- Loan Shopping: Knowing how multiple hard inquiries for the same type of loan are counted can enable you to shop for the best rates without undue harm to your credit score.
- Employment and Housing: Knowing that some employers and landlords may check your credit prepares you and lets you understand what they will see.
- Financial Planning: Knowing that you can check your own credit freely without impact encourages regular monitoring of your credit health.
Strategies for Managing Credit Pulls
Now that we have understood the difference between soft and hard pulls, let us explore some strategies that will help us manage them effectively:
1. Monitor Your Credit Regularly
Take advantage of knowing that a pull on your credit is a soft pull if you are pulling it. This can help you in:
- Identify errors or fraudulent activities early
- Be aware of your credit standing before applying for new credit
- Track your progress while you work on improving your credit
2. Apply for Credit Selectively
Since hard inquiries can impact your score, be selective about when to apply for new credit:
- Only apply for credit you really need and are likely to be approved for
- Whenever possible, space out your applications for credit
- Time: It matters in applications. Especially when you are planning to make huge purchases. For example, buying a home
3. Get Pre-Qualifications
These usually involve soft pulls by most lenders. This can tell you about your probable acceptance and the terms you will be offered without affecting your credit score.
4. Understand the Rate Shopping Exception
As you rate shop for certain types of loans, such as mortgages or auto loans, several hard pulls- usually 14 to 45 days- are treated as a single inquiry. This lets you shop around for the best rates without taking multiple hits to your credit score.
5. Be Prepared for Rental and Employment Checks
If you know a landlord or employer is going to check your credit, be prepared:
Preview what they will see on your credit report ahead of time. Prepare to explain any negative items. Sometimes, additional context or supplementation with further financial information may be required.
6. Dispute Unauthorized Hard Pulls
For hard pulls on your credit report that you have never authorized, you dispute them with the credit bureaus. Taking out inaccurate inquiries can help protect your credit score.
Common Misconceptions About Credit Pulls
There are many myths and misconceptions regarding credit pulls, amounting to bad decisions regarding credit management. Let’s clear a few of them out of the way:
Myth 1: All Credit Checks Hurt Your Score
As discussed earlier in this article, only the hard pull may affect your credit score. Soft pulls, including checking your own credit, have absolutely no impact.
Myth 2: You Can’t Be Approved for Credit Without a Hard Pull
However, most credit applications undergo a hard pull. Some lenders offer “no hard pull” products to applicants with well-established credit histories.
Myth 3: Shopping Around Always Hurts Your Credit
A short period can compare rates on select loan types through the rate shopping exception without taking multiple hits to your credit score.
Myth 4: Employers Can See All Your Credit Information
Employers can perform a background check that involves a credit check. Still, typically they will be viewing a modified report and are not obtaining access to a full credit history or score.
Myth 5: Removing Hard Pulls Will Significantly Boost Your Score
While removing hard pulls that should not be there is great, it seldom results in a big boost in the score, assuming you have a long credit history.
The Future of Credit Pulls
With technology evolving and financial services becoming more sophisticated, there will likely be a shift in how credit pulls occur. Watch these trends:
Alternative Data Sources
Lenders are increasingly considering alternative data sources as barometers of creditworthiness. This, in turn, can potentially lower the instances of traditional hard pulls because other factors become more imperative.
Open Banking
Open banking- the ability for consumers to securely share financial information with third parties transforms the process of access to and utilization of credit information.
Artificial Intelligence and Machine Learning
Sophisticated algorithms could mean a better interpretation of credit pulls and what they mean to creditworthiness.
Increased Consumer Control
A movement toward greater consumer control over personal financial information may impinge on how and under what circumstances credit pulls are performed.
Conclusion
Understanding the conceptual difference between hard and soft pulls is part of understanding your overall credit health. Although a soft pull represents a harmless way for one to review and monitor credit, the hard pull, notwithstanding the associated impacts with credit score, plays a necessary role in the lending process.
The more cognizant you are of when these different kinds of credit pulls are taking place and why, the better decisions you can make about your financial moves. Or put another way, there are a few important things to consider:
- Soft pulls do not at all ding your credit score, nor will lenders even see them.
- Hard pulls slightly lower your score and can remain on your credit report for as long as two years.
- Utilize credit judiciously, being very strategic about allowing hard pulls.
- Monitor your credit regularly with soft pulls and seek lots of pre-qualifications.
- Understand the rate shopping exception when shopping for specific types of loans.
Living in a world where finance is ever-changing, the ability to comprehend credit pulls, among other determinants of your credit score, will allow you to make responsible choices about your finances. We hope this guide demystifies the concepts of soft and hard pulls for you to deal with the seemingly tough world of credit confidently.
Your credit report and score are powerful tools in your financial armory. By going for credit pulls wisely and understanding and properly handling them, you go a long way toward building and maintaining a strong credit profile, which will serve you well in all your financial endeavors.
