Were you trying to do something when someone said to you, “We’ll need to run a hard credit check for this.”? Did you wonder what exactly that meant and why it matters? What is the difference between hard and soft credit checks? Here I’ll explain what a hard credit check (also known as a hard credit inquiry) is, what a soft credit check is, and answer the all important question of why it matters. In fact, I’ll answer that all important question right now. It matters because hard credit checks can affect your credit score. Specifically, many hard credit checks within a years time can adversely affect your score by a few points.
Example hard credit checks include:
- Credit card applications (where most people rack up the most inquiries)
- Home mortgage application
- Loan applications of all types, student or otherwise.
- Apartment rentals (Note: this sometimes falls under soft inquiry. Ask landlord for inquiry type details.)
- Opening brokerage accounts
Did you notice a commonality with all these activities? If so you would be absolutely correct! That commonality is that they all require you to have taken an action. Your authorization of a credit check is considered a hard check. You give permission for these to be run, they are the checks you know about. So why are they considered bad? Why do they negatively affect your score? Only running one hard credit check most likely won’t affect your score at all. However, if you ran say, five within a week, this likely would. Why? Because making multiple hard requests (requests you knowingly authorized) signifies to the evaluator that you are in need of money fast. This is especially true in the credit card space.
How exactly these things are evaluated is entirely at the discretion of the credit agencies. While it is not always true that a person applying for a lot of cards in a hurry is because they need money fast, it is a pretty safe bet to make. That said, some agencies know people like to shop for the best offers and will combine multiple requests and classify it as only one request. The degree to which such inquiries can adversely affect your credit varies, but of all the factors that your credit score is made up of, this one isn’t usually high impacting. You can expect many hard inquiries on your report to drop your score by a few points. These do get removed after two years, but only affect your score for one.
Soft Credit Checks
So how about soft credit checks? As you may be guessed, when dealing with hard and soft credit checks, if a hard credit check is one that requires your permission to be run, a soft credit check is one in which it is not.
Example soft credit checks include:
- Almost all “pre-qualified” offers
- Employment background checks
- Apartment rentals (Note: this sometimes falls under hard inquiry. Ask landlord for inquiry type details.)
- Sites like creditKarma (Awesome resource site, I highly recommend them)
Unlike a hard credit check, a soft credit check does not adversely affect your credit score. It also does not show on your credit report. To be blunt and to the point, the only real reason soft inquiries exist is so that companies and “authorized” individuals can check your score without you knowing. It’s how credit companies know how much to offer you on a new card. It’s how your existing credit card creditors know if they can adjust your rates, and it is how many landlords across the U.S. determine if they should rent to you. CreditKarma gets some kudos for at least using that little loophole to allow you to see your own score at any time, but make no mistake, they are using that data as well for targeted advertising to you.
So there you have it, the difference between hard and soft credit checks and why it matters. I recommend you check your credit report periodically to see what hard inquiries are on file. An easy way for you to spot identity theft is to look at our report and find hard inquiries for things you know you weren’t doing. Each of the three reporting credit agencies will let you obtain your credit report for free once every twelve months. For more information on how to do that, visit the Federal Trade Commission website.