WHAT IS SOFT CREDIT CHECK? How It Affects Your Credit Score

What is a soft credit check
Funding Circle

It’s a good idea to check your three credit reports on a regular basis. However, there is a distinction between monitoring your personal credit reports with Equifax, TransUnion, and Experian and granting someone else access to your credit information. A hard inquiry is one form of credit check that can harm your credit score. The other option, a soft credit check, will have no effect on those crucial figures. We’ll look at what a soft credit check means and how it can affect your credit score. We also compare the soft vs hard credit check and see the difference between the two.

What is a Soft Credit Check?

A soft credit check is a credit report inquiry initiated by you or a firm. It can happen even if you haven’t applied for credit and is mostly used to screen for preapproval lending offers or background checks. The good news is that a soft inquiry has no effect on your credit score, which is a numerical representation of your creditworthiness that creditors use to estimate the possibility of repayment if they issue a credit to you.

How a Soft Credit Check Works

Financial organizations and creditors may want to know how well you manage your debt and credit history. Creditors may also inquire about the number of late payments you have made or your credit utilization, such as how much you have borrowed on each loan or credit card. A soft inquiry, often known as a “soft pull,” allows a creditor to evaluate your credit history and credit score in order to determine how well you manage your credit.

Even when you check your personal credit report, a soft credit inquiry may occur. The following are some of the most typical types of soft inquiries:

  • You authorize a potential employer to check your credit.
  • Financial institutions with which you currently conduct business will run a credit check on you.
  • Credit card businesses that wish to send you preapproval offers will run a credit check on you.
  • You apply for a loan or mortgage pre-approval.

Although soft inquiries have no effect on your credit score, they do appear on your credit record.

The Advantages of a Soft Credit Check

Soft inquiries might help you understand how your credit score is reported to major credit agencies. One of the easiest methods to do this is to use the free credit reports and scores provided by your credit card company. Almost every credit card business provides a free credit score evaluation to customers, and each assessment differs depending on the reporting agency employed. These inquiries are referred to as soft pulls, and they might give you information on your credit score and credit profile every month.

The Fair Credit Reporting Act (FCRA) governs how credit bureaus and other entities gather and distribute financial information about you. You have the legal right to a free copy of your credit report from the credit bureaus every 12 months. You can also obtain a copy of your report by visiting the government-approved website AnnualCreditReport.com.

Soft inquiries, which appear on your credit record, can provide vital information about which businesses are considering providing you credit. These inquiries will be categorized as “soft credit check” or “inquiries that do not affect your credit rating.” This section of your credit report will include information on all soft inquiries, such as the requester’s name and the date of the inquiry.

Let’s look at a soft vs hard credit check.

Hard vs Soft Credit Check

Some credit checks are referred to as “hard,” while others are referred to as “soft.” The distinction between the soft and hard credit check is related to how each type of inquiry may affect your credit ratings.

Hard Credit Check

When you apply for something, a hard credit check or inquiry is normally performed. When a hard inquiry appears on your credit report, it has the potential to reduce your credit score.

Hard inquiries include the following examples of credit checks.

  • Loan applications (mortgage, auto, student, personal, etc.)
  • Applications for credit cards
  • Credit limit increase requests
  • Lines of credit applications
  • New utility programs
  • Rental applications for apartments
  • Skip tracing by collection agencies

Soft Credit Check

A soft credit check does not affect your credit score. They will not appear on your credit report if a lender checks them. Soft inquiries are only accessible on consumer disclosures, which are personal credit reports that you obtain.

Soft inquiries include the following examples of credit checks.

  • Credit checks on individuals
  • Credit offers with pre-approval
  • Applications for insurance
  • Current creditors conduct account reviews
  • Applications for employment

Why Does a Hard Inquiry Affect Your Credit When a Soft Credit Check Does Not?

The reason that hard inquiries affect your score but soft inquiries do not is that the number of hard inquiries may indicate to a potential lender that you are a risk. If you’ve had dozens of hard inquiries in the last six months, it suggests you’ve applied for a lot of credit. It could indicate that you are in severe need of money or that you are not managing your finances correctly.

Soft inquiries do not always imply that you are looking for funding. For example, if you’re trying to restore your credit, you might check it weekly. Maybe you’re looking for work and employers are monitoring your credit through background checks. These have no bearing on your potential risk as a borrower.

How Long Do Credit Inquiries Last?

The majority of credit reporting is optional. Credit card companies, for example, are not legally compelled to disclose client information with credit bureaus. Credit bureaus are also not required to include credit card accounts on credit reports. Account information is reported and included in credit reports because it benefits the companies involved.

Inquiries vary. Law requires credit bureaus to report when they allow anyone access to your credit information. Most inquiries must remain on your credit report for at least 12 months, according to the Fair Credit Reporting Act (FCRA). Employment inquiries must remain on your credit record for a period of 24 months.

Credit reporting organizations often preserve inquiries on your credit reports for two years. FICO, on the other hand, only considers hard inquiries that occurred during the last year. A hard inquiry that is more than a year old has no effect on your FICO Score.

VantageScore is once again more lenient when it comes to inquiries. If a hard inquiry decreases your VantageScore credit score, it should recover within three to four months (provided no new negative information appears on your credit report).

The Exception to Rate Shopping

As previously stated, some hard inquiries may have a negative impact on your credit score. Frequent credit applications suggest increased risk and may signal financial difficulties. Rate shopping, on the other hand, is an exception to the norm.

When you take the time to look for the best interest rate before taking out a new loan, you demonstrate financial responsibility rather than increased risk. Because rate shopping does not signal a higher risk of default, both FICO and VantageScore contain specific logic in their credit scoring models that analyzes these types of inquiries differently.

Deduplication is the name given to this specific logic. Here’s an example of how it works.

  • 45-Day Safe Harbor Period: FICO treats all student loan, auto loan, and mortgage inquiries as a single hard inquiry if they occur within a 45-day span. Older versions of FICO scoring models (still used by some lenders) include a 14-day window instead.
  • 14-Day Safe Harbor Period: VantageScore considers all inquiries that occur within a 14-day period to be one inquiry, regardless of application type.

Unauthorized inquiries

It’s a good idea to go over your three credit reports on a frequent basis. Reviewing your credit can assist you in monitoring for fraud and credit reporting errors that may result in lower credit ratings. The FCRA allows you to obtain a free copy of all three credit reports at AnnualCreditReport.com once every 12 months.

Look for inaccuracies and fake information while reviewing one of your credit reports. This includes looking for credit inquiries made without your authorization. You have the right to challenge improper credit inquiries with credit agencies if you uncover them. This Federal Trade Commission handbook may assist you in navigating the procedure.

Unknown inquiries may signal a more serious issue than a simple credit reporting error. Unauthorized credit inquiries may indicate identity theft. If you find any strange inquiries on your credit report, thoroughly analyze the remainder of your credit information for any other signs of fraud. If you are a victim of identity theft, go to IdentityTheft.gov for assistance in reporting and recovering from the crime.

Is it Possible to Fail a Soft Credit Check?

You may or may not fail a soft credit check. However, the information gathered during that process may prevent a corporation from contacting you. For example, if a firm offering a travel rewards credit card with a high credit score criteria pulls your score and discovers it is merely ordinary, that company may not send you a promotional offer.

Prequalification via a soft credit check may be part of the application process in some situations. Secured credit cards for those with bad credit, for example, rarely conduct a thorough hard inquiry. Alternatively, they may begin with a soft inquiry to determine whether you should proceed, which is advantageous. Why go through a hard inquiry that lowers your score if you’re not going to qualify?

Is It Possible for You to Remove a Hard Inquiry From Your Report?

Hard inquiries can lower your score slightly. As a result, you should avoid conducting unnecessary hard inquiries on your report. Fortunately, you must provide permission for these types of checks. The Fair Credit Reporting Act also safeguards your access to accurate credit file information.

You can challenge a hard inquiry on your report that you did not approve. Write a letter to the credit bureau stating that you did not consent to the inquiry and requesting that it investigate and make appropriate changes to your record.

Conclusion

Soft credit checks provide many benefits and nearly no drawbacks. They have no negative impact on your credit score and can help you stay informed or qualify for promotional offers. You should keep an eye on your reports and who is looking at them to ensure that your information is being handled safely. If you wish to protect your data, you can freeze your credit to make soft and hard inquiries impossible without your intervention.

Soft Credit Check FAQs

How many points is a soft credit check?

Most people’s FICO scores will be reduced by less than five points for each extra credit inquiry.

Does a soft credit check hurt your score?

Soft inquiries have no effect on credit scores and are not accessible to potential lenders who may affect your credit reports.

How many soft inquiries is too many?

Six or more inquiries are considered excessive and might have a negative influence on your credit score. If you have several inquiries on your credit report, some of them may be unlawful and can be challenged.

References

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