When applying for a personal or business loan, your personal credit is often one of the primary factors for approval. This means that lenders will typically pull either a hard credit check or a soft credit check on you. In this article, we discuss the differences between the two, including what they are and how they affect your credit.
If you’d like to check your credit for free before we get started, you can get a free score with Nav without impacting your credit score. Nav will also provide you with a free summary of your business credit.
What Is a Hard Credit Check?
A hard credit check is one of two types of credit inquiries and is typically used for loan and credit card applications. Hard credit checks give people your full credit report, including personal data, past payment history, credit information, public record information, past inquiries and your personal credit score. All hard credit checks require your approval.
To understand more, Fit Small Business interviewed Rod Griffin, Director of Public Education at 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 with a hard credit check is that you need to take some kind of action, such as applying for credit, to trigger a hard credit check.
How Does a Hard Credit Check Affect Your Credit Score?
Your credit score can be adversely affected by a hard credit pull. Ordinarily, every hard credit pull dings your credit score by 1 – 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.
For perspective, personal credit scores can range from 300 – 850. A “good” score is typically anything above 700 – 725. This means that if you’re on the borderline of a good credit score, a hard inquiry might drop you down into a “fair” or “poor” personal credit score.
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. This is because while lenders like you to have an active credit history, too many credit applications might signal financial distress. Moreover, if you have a borderline credit rating, even a 5 point deduction can hurt your ability to qualify for loans or 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 (like mortgages) during a short time frame, your credit score is protected from multiple hits.
A good rule of thumb with a hard inquiry is that you can have up to 2 inquiries on your report at once with no major effect. Once you exceed 2 inquiries in a two-year period, your credit score might begin to drop significantly and it might raise red flags with potential creditors and lenders.
However, hard inquiries can have a larger impact on your score if you only have a few accounts or a short credit history timeline. Of course, a high number of inquiries can also have larger adverse effects on your score. For example, people with 6+ inquiries are up to 8 times more likely to declare bankruptcy than people with 0 inquiries on their reports.
What Is a Soft Credit Check?
A soft credit check normally occurs when a person, organization, lender, or creditor, checks your credit as part of a background check or pre-approval process. Unlike hard credit checks, soft credit checks can be done without your permission. However, a soft credit check gives only a high-level credit summary and it doesn’t affect your personal credit score.
Soft pulls can therefore 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. Soft credit checks will also occur when you request your own credit report or if an employer pulls your credit as part of a background search.
How Does a Soft Credit Check Affect Your Credit Score?
A soft credit check doesn’t affect your personal credit score. In fact, soft inquiries appear only on credit reports that you yourself request. Rod Griffin of Experian pointed out that even then, they’re listed in a different section of the credit report from hard inquiries. Soft credit pulls aren’t visible to other entities that check your credit.
Bethy Hardeman of Credit Karma added that one of the biggest misconceptions with soft pulls is that a pulling your own credit will hurt your credit score. In fact, you can use services such as Credit Karma and NAV to stay up to date with your personal credit score. A good rule of thumb is to pull your credit report once a quarter.
What is the Difference Between a Hard & Soft Credit Check?
There are 3 major differences between a hard credit check and a soft credit check. The first is that depth of information, the second is the level of authorization needed, and the the third is the way in which the two types of credit pulls affect your credit score. Let’s take a quick look at these differences.
But before we do, it’s important to quickly note that credit inquiries don’t affect your business credit report or business credit score. This is why this article discusses personal credit inquiries and how they relate to your personal credit report and personal credit score.
Hard Credit Check
A hard credit check typically occurs when you apply for a loan or credit card. Hard credit checks bring up your entire credit history. Each hard credit check can decrease your credit score by 1-5 points and it stays on your credit report for up to 2 years where it’s visible to creditors.
Soft Credit Check
A soft credit check gives creditors a high-level summary of your credit report. Creditors do a soft pull to verify or 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.
When Do Hard & Soft Credit Inquiries Usually Occur?
Below is a helpful infographic showing you when to expect a hard credit pull or soft credit pull.
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 in-of-itself 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 Permission to Check Your Credit Score?
A hard credit check usually requires written permission while a soft credit check doesn’t. This is because a hard pull lets someone see your full credit report while a soft pull only gives a high-level summary. A hard credit check typically occurs only when you apply for a loan, credit card or something similar.
In most circumstances where a hard pull is required, 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 explicit consent to do a hard credit pull. Instead, the initiation of your application or transaction is considered to be consent.
This is why it’s common practice for creditors to 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.
When it comes to a soft credit check, FCRA allows creditors to do a soft pull without you even knowing about it (except for background checks, when 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, both soft and hard. If you see a fraudulent hard inquiry on your report, you can dispute it. If you do file a dispute, credit reporting agencies have 30 – 45 days to investigate and respond.
There’s typically no point in disputing a soft credit check. This is because it doesn’t affect your score and is invisible to everyone but yourself.
How Does Rate Shopping Affect Your 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 and treated as a 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 doesn’t limit its rate shopping inquiries to simply a mortgage, car, or student loan. Instead, they lump together all inquiries made during a 14-day window together as one for scoring purposes. 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 mean 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 Rod Griffin, Director of Public Education at Experian, a good rule of thumb is that if it’s not a mortgage, car loan, or student loan, assume every inquiry will be counted as an independent inquiry for scoring purposes. This means that if you’re an entrepreneur shopping around for small business financing, it’s wise to limit the number of applications you fill out so your credit doesn’t get hit too many times.
Credit Inquiries on Your Business Credit
If you’re a business owner, you may be wondering how business credit fits into all this. To get the answer, we contacted NAV, a business credit monitoring service.
Caton Hanson, NAV’s 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.
While similar, business credit reports and scores have many significant differences from personal credit. In fact, there are as many as 3 separate business credit report and more than 4 major business credit scores. If you’d like to better understand your business credit, check out our ultimate guides on business credit reports and how business credit scores work.
For perspective, Dun & Bradstreet is one of the leading business credit reporting agencies and are often used by trade partners and suppliers. To pull your D&B credit report, start by generating a DUNS number and your basic business credit report. Once you’re able to pull your D&B report, read our ultimate guide on your D&B credit report to help decipher it.
Both hard credit checks and soft credit checks play an important role in your personal financial health. This is because both types of personal credit inquiries are used by organizations, creditors, and lenders when assessing the creditworthiness of your company. Hard credit inquiries will typically affect your personal credit score while soft inquiries won’t.
That makes staying on top of these credit inquiries important since, as a small business owner, your personal financial health impacts your business’s finances. Nav lets you check your personal credit score for free (with no impact on credit) and will also get you a summary of your business credit. It’s an excellent place for any business owner to give their credit score a check up.