Editorial IndependenciaWe want to help you make more informed decisions. Certain clearly marked links on this page may take you to a partner website and may earn us a referral fee. For more information, see How we make money.
Recently, people seem much more interested in applying for new credit than in the past.
The number of people who said they are likely to apply for a new credit card in the next 12 months increased from 8.3% in 2020 to 12.0% in 2021, according to a survey by the Federal Reserve Bank of New York.
There’s nothing wrong with applying for new credit if it helps you achieve your financial goals, as long as you do it wisely. Every time you apply for a new loan, credit card, or mortgage, you’ll likely need to undergo a credit inquiry, also known as a credit pull or credit check, where a lender requests information about your credit history from credit bureaus. credit.
Credit inquiries are a necessary part of applying for new credit, but not all credit inquiries are created equal. Hard credit inquiries can cause a small drop in your credit score, while soft credit inquiries have no effect. While you shouldn’t let the prospect of a heavy credit pull stop you from applying for the credit you need, being strategic about your new credit applications can help you keep your credit score in good shape.
As long as you don’t overapply for new credit, how you manage your current available credit will affect your credit score far more than any new inquiries. Make sure you always pay your bills on time and in full, and keep your credit utilization ratio low.
Here’s what you need to know about hard and soft credit pulls, and steps you can take to minimize their impact on your credit score.
What are hard and soft credit spreads?
A credit inquiry, also known as a credit pull or credit check, is when a creditor requests information about you from one of three credit reporting agencies: Equifax, Experian, and TransUnion.
When you review your credit report, you’ll see a section about “Credit Inquiries.” This section will show all credit inquiries that have occurred in the last two years.
There are two main types of credit inquiries:
- Hard Credit Extraction: Generally, the term “credit pull” refers to a hard credit pull. A hard credit pull occurs when a creditor requests your information after you submit an application for a form of credit, such as a new credit card or mortgage.
- Soft credit withdrawal: Soft credit pulls happen every time someone reviews your credit file. If you check your own credit, apply for an apartment, or have an employer run a background check and check your credit, a soft credit inquiry will be done.
Typically, when a lender plans to run a soft credit pull, such as if you’re prequalifying for a personal loan or credit card before you apply, you’ll see something in the fine print along the lines of “soft credit pull.” soft credit. ” or “it will not affect your credit score”. When in doubt, you can always check with the lender or institution requesting the credit pull.
|Hard credit extraction||Soft credit withdrawal|
|when it happens||These occur when lenders check your credit after you apply for a credit card, loan, or other form of credit.||These happen when you check your own credit, when lenders offer prequalification quotes, or when an employer or landlord checks your credit.|
|Length of time on credit report||FICO only considers inquiries from the last 12 months when calculating your credit score, but inquiries remain on your report for two years.||May appear on credit report for two years|
|Impact on credit score||You can lower your FICO score by up to five points||No effect on credit score|
Hard query vs. soft: When are these queries used?
Credit inquiries are a common occurrence, required for things from getting a loan to applying for an apartment. But not all credit inquiries are created equal. To protect your credit score, it’s important to understand when credit inquiries occur and the effect they can have on your credit.
Lenders pay special attention to hard credit inquiries on your credit report, says Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling, a nonprofit credit counseling organization.
“Current credit scoring algorithms look at whether or not the consumer is looking for additional credit,” says Coleman. “That’s because lenders worry consumers are going overboard.”
The following scenarios are examples of when you would undergo a hard credit pull:
Soft credit inquiries show up on your credit reports, but they don’t affect your credit score. Soft inquiries may be more common, according to Amy Maliga, financial educator for Take Charge America, a nonprofit credit counseling agency.
“A soft credit [pull] it happens every time someone checks your credit,” says Maliga. “You check yours, an employer does a background check, you get a mortgage pre-approval, or you get credit counseling like we offer at Take Charge America – a soft credit pull happens. It is strictly informational.”
The following scenarios are examples of when you would have a soft credit pull:
- Request a rate quote from a personal loan lender, and the lender specifies that getting a quote requires a gentle inquiry that won’t affect your credit
- You check your credit reports
- Signed up for a credit monitoring service that checks your credit monthly
- A potential employer checks your credit as part of a background check
- You apply for life insurance
How do soft and hard credit withdrawals impact your credit?
The impact of a credit extraction depends on the type of inquiry that is made. While soft credit inquiries don’t change your credit score, hard credit inquiries do.
“What can you do [hard credit inquiries] scary thing is that they have the ability to negatively affect your credit score,” says Coleman.
A hard credit inquiry can lower your score by up to five points, according to credit scoring company FICO, but the impact depends on your existing credit history.
Credit inquiries, both requested and unsolicited, can stay on your credit report for two years, but that doesn’t mean they’ll affect your credit score all the time. Soft credit pulls won’t affect your score at all, and hard credit inquiries will affect your credit score for 12 months. However, a hard credit inquiry has less of an impact on your credit score as you get older.
“Hard credit pulls can affect your credit score, but it’s a short-lived impact,” says Maliga. “In general, if your credit is in good shape, a little dip isn’t a big deal.”
What should you do with a credit inquiry?
Before applying for a new line of credit and accepting a credit inquiry, use the following tips to limit the impact a credit inquiry will have on your credit score:
- Check your credit report: “Always keep an eye on your credit report,” says Maliga. “Make sure all of the hard credit inquiries listed there are things that you initiated.” If you see any inquiries that you didn’t consent to, or see any other errors, you can dispute those items with the credit reporting agencies. If they are found to be fraudulent or the result of an error, the credit bureaus will remove them from your credit reports. You can access your credit reports for free at AnnualCreditReport.com.
- Compare prices using prequalification tools: Lenders that offer pre-qualification tools give you a convenient way to check your eligibility and potential rates without a hard credit inquiry. They can be a good way to compare prices without damaging your credit.
- Group the requests together: If you’re looking for mortgage or loan rates, please submit your quote requests together. “Typically, when someone is looking for a mortgage or car loan, the credit scoring model looks at similar credit inquiries within a certain period of time and groups those credit scores together,” says Coleman. “They’re considered a single inquiry, so they don’t have much of an impact on your credit score.”
- Check the eligibility criteria before applying: Many lenders and credit card issuers list their minimum borrower requirements, such as credit score and minimum income, on their websites. By reviewing that information, you can see if you meet their criteria without having to complete an application.
- Limit new credit applications: New credit inquiries affect your credit score, and recent activity accounts for 10% of your credit score. “Don’t send requests unless you really need to,” says Coleman. “Don’t send just to see if you can get a particular credit card.”
Although a strong credit pull can negatively affect your credit score, the impact is usually quite small, and your credit score can bounce back quickly. What’s more important is how you use your credit once you get it: make sure you always pay your bills on time and in full, and maintain a low credit utilization ratio on your credit cards.
Don’t let fear of credit inquiries keep you from getting the credit you need to meet your financial goals. By managing your credit wisely and limiting new credit inquiries to only when you really need a line of credit, you can minimize the drop in your credit score.