Hard and Soft Credit Inquiries: Drawing the Line

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If you are a product, your credit score is the price tag. It conveys the cost of onboarding you as a customer that banks will have to bear over your lifetime. Naturally, the lower this cost is, the better your chances are of selling yourself.

But, how do banks determine your credit score? This is where the crux of our topic lies. To understand the process, let’s first look at the two types of credits pulls that exist and how they impact your credit scores:

1. Hard Credit Inquiry

They are also referred to as ‘Hard Pulls’ and involve an inquiry from a finance company or bank (potential lender) to decide whether to extend credit to you or not. These generally take place in the case of credit card, mortgage, or loan applications. They are always executed after factoring in your consent.

A primary characteristic of a hard inquiry is that it impacts your credit score every time that it is pulled. For instance, if five different financial agencies pull a hard inquiry on your account at any given point in time, the impact on your credit score is five times as likely. This is because such inquiries notify the credit rating agencies that you’ve actively applied for new credit. Depending on the type of loan you’re applying for, the impact of hard pulls can remain on your profile for around two years.

2. Soft Credit Inquiry

Soft checks are routine processes that do not require the consent of individuals. They can take place for multiple reasons such as:

  • Potential lenders checking the creditworthiness of individuals for pre-approved offers.
  • Existing lenders checking to determine whether the borrower is still creditworthy.
  • Individuals checking their own credit ratings from time to time.

They usually do not return as much information as hard checks. For this reason, soft inquiries do not have any impact on credit scores. It can be used by both the individual or the lender multiple times without changing the credit score since they are never factored in as a variable in credit scoring models.

How to Manage Your Credit Inquiries

While you have nothing to worry about with soft inquiries, mismanaged hard inquiries can dry out your credit score even if you end up availing zero additional credit. Here is how you can efficiently manage their impact:

  • Applying for additional or new credit requirements only when you truly need it.
  • In case you are planning to apply for multiple loans, such as an auto loan and mortgage, try to keep the time frame between them as short as possible.
  • Check your credit reports at regular intervals to ensure that all hard pulls are legitimate and made by you. Any invalid pull can potentially be a credit/identity fraud.
  • Keep other important factors under check, such as your payment history and credit utilization rate.
  • Pay every bill/EMI on time and make it a point to pay off your credit card debt as quickly as possible.

Remember that the main difference between hard and soft inquiries boils down to whether you are giving official permission to a financial company or not. So, always ensure that consent is given only to trusted third parties.

And if your credit score has suffered due to multiple hard inquiries, do not fret. It is more than likely to bounce back within a few months of good credit behaviour. Moreover, if only a couple of hard pulls have been made in your name and the new credit is subsequently granted, the positive impact of the increase in credit may cancel out the negative impact of the inquiry.

What measures do you take to keep your credit score healthy? Share with us in the comments section.

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