Hard Inquiries vs Soft Inquiries: How Do They Affect Credit Scores?

When interested parties evaluate your credit report, they typically perform a hard credit inquiry or soft credit inquiry. Whether they perform a hard or soft credit inquiry depends on the nature of the event prompting the credit inquiry. Hard credit inquiries are often performed when assessing an application for some form of credit, whereas soft credit inquiries are performed for credit preapproval or events unrelated to credit. But perhaps the most important difference to keep in mind is that these different credit inquiries have different impacts on your credit score.

Below examines the differences between hard credit inquiries and soft credit inquiries in more detail, including when, how, and why they’re performed, and some tips to avoid lowering your credit score!

What Are Credit Inquiries?

A credit inquiry occurs when an individual or institution inspects your credit report. This may happen when you apply for a loan, lease, or new job.

Wondering where your credit stands? According to Equifax, the average credit score in the United States is 698.^[1]Equifax. “What Is the Average Credit Score by State?“. Accessed September 8, 2022. The credit scoring system implements a range of metrics to determine your “creditworthiness” through the eyes of credit reporting bureaus. While other factors play a role in your credit score, such as debt levels, missed payments, and revolving credit utilization, credit inquiries are one of the most widely known components of your credit file.

Do credit inquiries matter?

Yes. Credit inquiries matter because they appear on your credit report and directly shape your personal and business credit score. Because credit inquiries suggest you’re seeking some sort of funding, the more inquiries on your report, the lower your credit score.

What are credit inquiries used for?

Let’s take a look at some popular events triggering credit inquiries:

• Credit card applications
• Loan applications
• Lease applications
• Mortgage applications
• Job applications
• Merchant account applications

Additionally, applications for various new accounts—such as a mobile phone line or utility service—may prompt a credit inquiry. A credit inquiry can also occur if you pull your credit file, so be mindful of the methods you employ to view your credit details.

What Is a Hard Inquiry?

How much does a hard inquiry affect your credit score?

A hard inquiry’s precise impact on your score is difficult to predict. As a rule of thumb, expect your credit score to decrease by five or fewer points due to a hard credit pull. However, your credit score may decrease more if multiple hard inquiries are performed in a short period of time.

What Is a Soft Inquiry?

Hard Inquiries vs. Soft Inquiries

To avoid needlessly damaging your credit score, understanding the difference between hard inquiries and soft inquiries is critical. Below explains the two fundamental differences between these inquiries:

1. Purpose: A hard inquiry determines your eligibility for new credit, financing, or other fiscal arrangements. On the other hand, soft credit checks relate to non-financing events, such as applying for a job or checking your credit report.
2. Impact on Your Credit File: Hard inquiries impact your credit score, but soft inquiries do not.

Examples of Hard vs. Soft Inquiries

A popular practice in the credit card industry is a prime example demonstrating the determining elements for a hard credit pull or soft credit pull. In the United States, many credit card issuers preapprove potential clients to entice them to apply. Preapproval requires only a soft credit check to determine a borrower’s creditworthiness. If the potential client formally applies for the credit card, a hard credit check must be performed before the application is approved and credit is issued.

Does Checking Your Own Credit Score Lower It?

Fortunately, checking your own credit score does not lower it. Before applying for a credit card, loan, or another form of financing, checking your credit score is advisable. Additionally, checking your credit score routinely helps you spot fraud, mistakes, and other issues impacting your credit score.

If you want to prevent other parties from checking your credit score, you can freeze your credit score. However, you may be asked to unlock your credit freeze upon submission of an application requiring an associated credit check.

Note: Only personal credit may be frozen. Business credit scores cannot be frozen.

When you check your credit score, a soft credit pull is performed. As stated above, soft credit inquiries should not impact your credit score.

Many financial institutions now offer consumers free credit checks. Additionally, the three major credit reporting bureaus—Experian, Equifax, and TransUnion—are legally required to provide consumers with a free credit report every 12 months.

Four Ways to Minimize the Effects of Hard Inquiries

1. Keep Your Credit in Order: To mitigate the impacts of hard inquiries, ensure other elements of your credit file are in good standing. Start by making on-time payments, minimizing your credit utilization, and checking your credit file routinely for signs of fraud.
2. Opt for Soft Credit Inquiries: You can often obtain preapproval via a soft inquiry. In doing so, a lender can perform a soft inquiry to evaluate whether you’ll be approved for credit, rather than performing a hard inquiry only to reject your application.
3. Dispute Improper Inquiries: If a hard inquiry is on your report by mistake, file a dispute with the appropriate credit bureaus. Eliminating incorrect items from your credit report can improve your score.
4. Practice Patience: The longer you wait between hard inquiries, the lower their impact.

Note: For more guidance, check out our tips on how to build your business credit score.

How to Dispute or Remove the Effects of Credit Inquiries

If you find inaccurate credit inquiries on your credit report, you can remove them from your file to improve your score.

First, make sure the reason for the dispute is genuine. If you applied for a credit card, which resulted in a hard inquiry, you won’t be able to remove this credit check. However, if you did not consent to this credit check, you may still successfully remove it. This is also the case in the event of identity fraud.

To begin the dispute process, contact the party responsible for the hard inquiry and ask for the reason for the credit check. If you believe it’s fraudulent, communicate this to the responsible party. If the party does not communicate with you, supports a false claim, or otherwise refuses to remove the hard credit pull, contact the credit reporting bureaus. Each credit bureau has a dispute process through which you may submit complaints.

Hard Inquiries vs. Soft Inquiries: Final Thoughts

Now that you understand the differences between hard inquiries and soft inquiries, take advantage of this knowledge and reduce the impact of hard inquiries on your credit report. By opting for soft credit inquiries, especially for preapproval, you can maintain a good credit score and access the credit you need. If you’re an entrepreneur searching for business funding options, consider partnering with a merchant services provider. Your dedicated advisor can guide you towards soft inquiring options with no effect on your credit score, all while advocating for you to secure lower interest rates and better financing terms!