Credit Reports- Know the Difference between Hard Inquiries and Soft Inquires

One should never neglect the impact of credit scores and credit reports in their life. Credit reports are important tools for avoiding fraud and identity theft in society. One should be aware of the significance of credit reports when it comes to financial accounts and why they need to be viewed for various reasons. A credit report can be viewed by lenders, employers, insurance companies, and other organizations subject to the permission of the individual. When there is an extension of credit to an individual, the credit-extending party has the right to view credit reports before approving the sum of credit that has been requested to be extended. 

What is the difference between hard inquiries and soft inquiries?

When a creditor or a lender asks a credit bureau to view the credit report of an individual, it gets noted as a part of the credit history. There are two types of credit report inquiries, and they are known as "hard inquiries" and "soft inquiries."

Hard and soft inquiries- do they reflect on credit reports and impact credit scores?

A hard inquiry refers to a case where a lender with whom one has applied for credit reviews has viewed the credit report for making a decision. This inquiry appears on the credit report and can impact the credit score of an individual.

A soft inquiry refers to the case where one checks the credit score himself or herself or a credit card company checks the credit score of an individual to approve an offer. Note that a soft inquiry does not reflect on a credit report and does not impact credit score at all.

A closer look

When an individual applies for credit like mortgage or credit card, the lender seeks permission to view credit reports in order to check credit score from one of the 3 major credit reporting bureaus- Equifax, Trans union, and Experian. Since these inquiries are connected to the actual application for credit, they are known as hard inquiries, and they can affect credit scores.

The impact of hard inquiries on credit scores

If there are many hard inquiries within a short span of time, the above is alarming to lenders. The reason being that several inquiries can open many accounts. When a person opens several credit accounts, this implies that one is facing problems paying bills and is susceptible to overspending. The result is a hard inquiry to have a negative and temporary effect on credit scores of an individual.

Models for credit scoring consider the fact that one is shopping for different rates on the best loan deals available. Most models consider many inquiries for a specific credit product like a mortgage or car loan in a short span of time a single inquiry. This will create a smaller impact on the credit score of an individual over separate and multiple inquiries.

One of the major factors in calculating credit scores are inquiries. Other factors that determine your credit score are payment history, the different kinds of credit, the ratio of credit utilization, the duration of time that one has been using credit. These factors influence credit score to a large extent. However, note that hard inquiries are rarely the main reason why credit has been denied to an individual.

Hard inquiries- how long do they stay on a credit report?

Hard inquiries stay on the credit report of a person for over 2 years; however, their impact on the credit report of an individual lessens with the duration of time. Note that if an individual has many hard inquiries in just a few months, a potential lender will generally not give them too much importance. The history of making payments on time along with low credit utilization is very important for most credit scoring models as well as lenders that use them for making decisions.

Note that one cannot remove an accurate hard inquiry from a credit report however if a lender or a company has pulled out the above without permission, one can request a credit bureau to remove that inquiry from the file. One should be aware of the fact that if a hard inquiry has been conducted by a lender that one does not identify, this is a sign of identity theft and someone else is trying to get credit in another person’s name. It is crucial for one to take immediate action to arrest the issue and look into things to check whether the inquiry belonged to them or not.

Soft inquiries

When one checks their own credit report or provides consent to a potential employer and the like to review a credit report, a soft inquiry takes place. Soft inquiries generally take place when a business like a lender, insurance or credit company conducts them to check credit scores for approving an offer before one takes it.

Soft inquiries are never linked to specific applications for new credit, and they are visible on credit reports subject to two exceptions-

·        Soft inquiries are visible to a person except when insurance companies are able to see the inquiries of other insurance companies, and

·        Inquiries that have been made by debt settlement agencies that have been authorized for

accessing reports and can be shared with the present creditors of an individual.

Note, the above inquiries have no impact on the credit score of an individual as they are not considered to be a factor in models for credit scoring. Soft inquiries are never disputable – they are available for reference only. Potential lenders cannot view them with the exception of insurance companies that are able to see the inquiries of other insurance companies. Note that a soft inquiry is never a factor considered for models that determine credit scoring.

Last but not least, one should always manage their credit inquiries well. Apply for any credit only when needed. Shop in a short duration of time when applying for auto and mortgage loans. Regularly check credit reports to identify signs of identity theft and fraud. Make sure one manages other factors like history of credit payments and the rate of credit utilization to effectively manage credit scores.