Your personal credit score is one of the most important indicators of your financial health, and it affects your ability to get business financing and other types of loans.
In this article, we will answer the following questions. Will my credit score be affected if I apply for a loan, and the lender checks my credit? Is it ok to rate shop for a loan? Will checking my own credit affect my score? Does a creditor need permission to check my credit?
Answering these questions centers around the difference between a hard and a soft credit check:
- A hard credit check occurs when you apply for a loan or initiate certain other kinds of financial transactions, such as signing up for a new cell phone contract. It brings up your entire credit history. Each hard credit check can decrease your credit score by 1-5 points and stays on your credit report for up to 2 years, where it’s visible to creditors.
- A soft credit check gives creditors a summary of your credit report. Creditors do a soft pull to send you pre-approval offers. Other entities, like employers and insurance companies, may also do a soft pull of your credit. A soft credit check does not affect your credit score and is not visible to creditors.
How can you check your credit scores with a soft pull? There are a number of services that allow you to to check your credit score for free, such as Credit Sesame, Credit Karma, and NAV. NAV has the added advantage of being able to check your personal credit scores, as well as your business credit scores for free. Click here to check your scores with NAV.
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How to Get a Small Business Loan.
Hard vs. Soft Credit Checks in Detail
When a potential creditor, employer, landlord, or other party checks your credit history, it is called a “credit pull” or “credit inquiry.” The credit check can be a hard or soft inquiry.
What is a Hard Credit Check, and How Does it Affect My Credit Score?
A hard credit pull brings up your full, detailed credit history. To understand more, I interviewed Rod Griffin, Director of Public Education for Experian, one of the three major consumer credit agencies.
Griffin said that a hard inquiry most commonly occurs when someone applies for a credit card, business loan, mortgage, or some other type of loan. Sometimes, other consumer-initiated transactions, such as signing up for a new cell phone contract, can also trigger a hard credit check. The key is that you need to take some kind of action, such as applying for credit, to trigger a hard credit check.
Your credit score can be adversely affected by a hard credit pull. Ordinarily, every hard credit pull dings your credit score by 1 to 5 points. Although your score usually bounces back in less than a year, a hard inquiry stays on your report for 2 years, where it’s visible to anyone else who does a hard pull.
5 points may not seem like a lot, but one too many inquiries can make a lender wonder if you’re a good credit risk. Moreover, if you have a borderline credit rating, even a 5 point deduction can hurt your ability to qualify for the most favorable loan terms.
Bethy Hardeman, Chief Consumer Advocate for Credit Karma, said that the exact impact on your credit score depends on your credit rating when the inquiry occurs, the kind of loan or credit you’re seeking, and the number of other inquiries that have happened around the same time. For example, when you’re shopping around for certain types of loans during a short time frame, your credit score is protected from multiple hits (more on this below).
What is a Soft Credit Check, and How Does it Affect My Credit Score?
If a hard credit check is the complete book of your credit history, a soft credit check is the summary on the back cover. A soft pull provides a broad overview of your credit history, and it does not affect your credit score.
Soft pulls can occur without you taking any sort of action. For instance, when you receive pre-approval offers in the mail from a credit card company, the company has done a soft credit check on you. Requesting your own credit report or an employer checking your credit are other examples of soft credit checks.
Soft inquiries appear only on credit reports that you request. Griffin pointed out that they are listed on a different section of the credit report from hard inquiries. Soft credit pulls are not visible to other entities that check your credit.
How Will Rate Shopping Affect My Credit Score?
When you apply for a loan, it’s common to shop around for the best rate. Fortunately, FICO and VantageScore, the two main credit scoring models, have special rules that don’t penalize you for rate shopping.
FICO ignores mortgage, car, and student loan inquiries that occur together within a 30 day period. Such inquiries will still appear on your credit report but won’t affect your score. After 30 days, additional inquiries during the next 45 days are grouped together as one hard inquiry for scoring purposes. For example, if you apply for 3 car loans during a 30 day period, those applications won’t affect your score at all. After that, if you apply for 3 more car loans within 45 days of each other, the applications will count as one hard inquiry and only reduce your credit score by up to 5 points.
VantageScore treats all rate shopping inquiries (not just mortgage, car, or student loans) as one inquiry during a 14-day window. For example, if you apply for multiple credit cards during a 14-day period, VantageScore will count that as one hard inquiry.
These special rules means that it’s ok to shop around for certain types of loans without worrying about it hurting your credit score. However, different lenders use different scoring models, so it’s difficult to predict which rate shopping rules will apply when. According to Griffin, a good rule of thumb is, “If it’s not a mortgage, car loan, or student loan, assume every inquiry will be counted as an independent inquiry for scoring purposes.” For instance, if you’re an entrepreneur shopping around for a business loan, it’s wise to limit the number of applications you fill out so your credit doesn’t get hit too many times.
When Do Soft and Hard Inquiries Occur?
Here’s a breakdown of when to expect a soft credit pull or a hard credit pull, based on information from Credit Karma.
In general, whenever you’re taking on a new financial commitment, you can expect a hard credit check. For instance, getting a new cell phone or moving into a new apartment will mean a new monthly payment, so creditors want to know your full credit history. Also, if you sign a document authorizing someone to check your credit, that can trigger a hard pull. If you’re ever unsure whether a potential creditor or financial company is doing a hard or soft credit check, ask them.
Do Creditors Need Your Permission to Check Your Credit?
A hard credit check occurs only when you apply for a loan or credit card or initiate other transactions where your credit history is relevant. In those circumstances, an entity has “permissible purpose” under the Fair Credit Reporting Act (FCRA) to check your credit. For example, a bank has permissible purpose to check your credit before allowing you to open an account. If you initiate a transaction and a creditor has “permissible purpose,” they do not need your consent to do a hard credit pull.
Nonetheless, creditors will typically notify you in the fine print of a loan application or a contract that they plan to check your credit. If you don’t want your credit pulled, hold off from signing the document and providing personal information such as your SSN and DOB.
The FCRA allows creditors to do a soft credit check without you even knowing about it (except if done for employment purposes, in which case written permission is required). Creditors most often do soft pulls so they can send you pre-approval offers in the mail. If you don’t want to receive prescreened offers for credit cards and insurance, you can call toll-free 1-888-5-OPT-OUT or visit optoutprescreen.com. Do keep in mind that opting out limits your ability to access special incentives and low rates for credit cards and other financial products.
By requesting a free copy of your credit report, you can view every inquiry that’s been performed on your credit (soft and hard). If you see a fraudulent hard inquiry on your report, you can dispute it. There’s no point in disputing a soft credit check, since is doesn’t affect your score and are invisible to everyone but yourself. The credit reporting agency has 30-45 days to investigate and respond to your dispute.
If you’re a business owner, you may be wondering how business credit fits into all this. To get the answer, we contacted Creditera, a business credit monitoring service. Caton Hanson, their co-founder and General Counsel, says that “business credit works a little differently than personal credit because permissible purpose (FCRA protections) doesn’t apply. Anyone can pull anyone else’s business credit–all they really need is the business’s name and address.”
Since it’s easier to check a business’ commercial credit, you won’t be penalized for inquiries into your business credit. According to Hanson, financing and credit-related inquiries may show up on your business credit report, but they won’t impact your score.
If you’re initiating a financial transaction or applying for credit, that will typically result in a hard inquiry. This can adversely affect your credit score and stay on your credit report for up to 2 years. Fortunately, if you’re simply shopping around for the best rate on a home, auto, or student loan, that generally won’t hurt your credit score.
In other cases, creditors, potential employers, or other entities may do soft pulls of your credit. That won’t affect your credit score and will not be visible to other parties on your credit report. If you’re in doubt about whether a financial company or potential creditor is doing a hard or soft credit check, it’s best to ask the company.
Need some money for your business? Click here to get our FREE Guide:
How to Get a Small Business Loan.