Soft vs. hard credit checks: What’s the difference?

You are probably aware that when you apply for a loan or credit card, the potential creditor checks or ‘pulls’ your credit report and score. But did you know there are other situations, like a prospective employer reviewing your credit report, that also register as a credit check? Here’s what you need to know about the two types of credit checks, and the different ways they affect your credit score.

What is a hard credit check?

A hard credit check is when a lender pulls your credit report because you’ve applied for new credit, such as a credit card, a car loan, a home loan or an increase to an existing line of credit. Hard credit checks can affect your credit score (the most common is your FICO® Score) because seeking new credit can make you seem like more of a risk to lenders, who may worry about your ability to pay back the debt.

Hard credit inquiries don’t hurt much

Here’s the good news: For many people, the damage from hard checks is minor, usually less than five points off your credit score. One or two credit checks will not significantly harm your credit.

Don’t let concern about credit checks keep you from shopping around for the best deal on auto loans, student loans or mortgages. Hard credit checks that occur for specific items like these, and that happen within a certain time frame—FICO calls them shopping periods—are usually treated as a single inquiry. While each lender may use a different formula to calculate a shopping period, it’s typically 14–45 days.

When to be cautious

New lines of credit represent only 10 percent of your credit score, according to myFICO.com, but that doesn’t mean you should rack up hard inquiries without giving it a second thought.

• Although credit checks are factored into your credit score for only 12 months, they remain on your credit report for two years.
• Credit checks can have a greater impact for someone with a short credit history and few accounts, compared with someone who has a long history and wide range of credit experience.
• To a lender reviewing your credit report, many hard credit checks in a short time may indicate higher credit risk because it could appear that you are trying to get a lot of credit quickly. (The exception is if you rate shop for a car, student or home loan during a short period.)
• Drops in your credit score can result in higher interest rates when you borrow, which means you pay more over the life of a loan.

What is a soft credit check?

A soft credit check is when your credit report is pulled but you haven’t applied for credit. For example: Insurance companies or potential landlords may look at your credit report to assess risk; potential employers may do background checks. Credit card companies can also pull a soft copy of your credit to service and manage any existing relationships you may have with them. Soft checks do not affect your credit score or show up on your credit report.

Protect your credit

To keep your credit score healthy, avoid hard checks when you can. Try to say no to those store credit cards offered to you at checkout if they don’t make sense in your larger financial picture. If you rate shop for a car, student or home loan, it’s best to keep it within a 14- to 45-day window so multiple credit checks are recorded as one. Also keep an eye on your credit report. If you see a hard check you did not initiate, take action to protect yourself from identity theft.