Did you know that every time a lender, landlord, employer, or financial institution requests access to a credit report it results in a credit inquiry? Some of those inquiries go on to become part of your credit history. More importantly, they have the potential to affect your credit score.
There are two types of credit inquiries: hard and soft. While soft inquiries don’t typically affect individual credit scores, there are instances where hard inquiries will.
Whether you’re a consumer, or a professional who engages in financial screening, it’s important to understand the differences between hard and soft inquiries – and what those differences mean.
Hard Inquiries vs Soft Inquiries
In most cases where a credit inquiry is initiated, it prompts a code describing the purpose for the request. That purpose is what helps to determine whether the inquiry being made is hard or soft.
Some of the key differences between hard and soft credit inquiries are outlined below:
Hard Credit Inquiries:
- a hard credit inquiry results when a credit report is viewed as part of the decision-making process for extending a loan
- examples include consumer applications for credit cards, mortgages, and vehicle financing
- hard inquiries require permission from the consumer being screened
- they remain on the consumer’s credit report for two years, are typically factored in by credit scoring models, and can lower an individual’s credit score
Soft Credit Inquiries:
- a soft credit inquiry results when a credit report is viewed for purposes other than processing an application for new credit
- examples include consumers checking their own credit reports, “pre-approvals” connected to mortgages, insurance offers, and credit card promotions, and credit checks associated with employment screening
- soft inquiries can sometimes be initiated without the consumer’s permission
- they don’t appear on the consumer’s credit report, so are not utilized by credit scoring models and have no effect on credit scores
The most important thing to understand when it comes to hard vs soft credit inquiries is this: the greater the number of hard inquiries on a credit report, the more cause there may be for concern.
Deciphering Credit Inquiry Results
The impact of hard inquiries on most consumer credit scores is both temporary and minor. They’re typically countered by on-time payment histories and low credit utilization rates – and their significance decreases over time.
Multiple short-term hard credit inquiries related to a similar product (think: mortgage or car loan) often indicate nothing more than a session of consumer rate-shopping. Most credit scoring models lump these into a single inquiry, so their effect on credit score outcomes is minimal.
You should recognize, however, that multiple hard inquiries over a short period of time sometimes indicate:
- an individual who’s been having trouble qualifying for credit,
- a high-risk borrower who’s been actively seeking new credit, or
- a consumer with multiple new credit accounts that may encourage overspending and financial mismanagement
According to the people behind the FICO credit scoring model, individuals with five or more hard inquiries in the past year were “six times more likely to become 90 days past due or greater on a credit obligation compared to people who had no credit inquiries.”
While hard credit inquiries can’t typically be removed from a credit report, they can if they were initiated in error or without the proper permission. It’s a good idea to review your personal credit history on a regular basis, since unauthorized inquiries can be a sign of potential identity theft.