Credit can be a complicated subject at times. Your credit history consists of a smorgasbord of different financial behaviors. From there, lenders analyze and use the information to decide interest rates, borrowing limits, and if you’re even worthy of a loan in the first place.
One of the strangest things that can impact your credit is the oft-discussed but misunderstood concept of a credit pull.
What Impacts Your Credit?
A person’s “credit” concept refers to a financial analysis system that helps lenders judge a borrower’s creditworthiness at a glance. It is most often associated with:
- Your credit report: This consists of a ledger of your relevant financial behavior and history.
- Your credit score: This is a numerical grade that helps lenders decide at a glance if you’re worthy of a loan.
Many factors go into calculating your credit. Some of these are positive, such as using a credit builder card, utilizing less than 30% of your revolving credit, and paying off your debt.
However, many factors can hurt your credit. For instance, owing too much money, missing payments, and declaring bankruptcy can all hurt your credit to varying degrees.
One of the strangest ways that your credit score can go down is through a credit pull. Also called a credit check or credit inquiry, a pull occurs when a lender checks your credit report before giving you a loan. This can happen in two different ways: via a hard pull and a soft pull.
The Difference Between a Hard and a Soft Credit Pull
A credit pulls always consists of a review of your credit report. However, there are two different ways to go about the activity.
A Hard Credit Pull
Hard inquiries take place when you apply for a new line of credit. If you fill out an application for a loan, the issuer will often request a formal check of your credit report about the request for a loan. This generates an official hard credit pull, which shows that you asked for a loan. This could be for a variety of reasons, such as applying for:
- A mortgage;
- An auto loan;
- Student loans;
- A personal loan;
- Certain credit cards.
The important factor to remember is that a hard inquiry appears when you ask for money from a lender. This jumpstarts a domino effect that ends with a hard inquiry on your credit report.
A Soft Credit Pull
A soft inquiry is similar to a hard inquiry in the sense that it also involves someone, most often a lender, checking your credit report. However, a soft pull takes place when the individual or entity does this separate from any initiation on your part to borrow money. A few reasons that this could take place include:
- A lender looking to pre qualify you for a loan offer;
- A lender checking your credit in connection with an existing credit card or some other loan;
- An employer checking your credit as part of a background check (this should be done with your permission but is considered a soft check since it isn’t related to a loan.)
- Check your own credit via a report website, credit card company, or other online banking portals.
In all of these cases, the credit checks are not related to opening up a new account. Instead, they are simply checking the current state of your credit.
within a few months. At times it may impact your score for up to a year, but the effect shouldn’t last longer than that.
Be warned, though, that the hard inquiry can continue to show up on your report for up to two years. If you see a hard inquiry lingering for more than a year, chances are it isn’t impacting your credit anymore.
Unlike a hard inquiry, a soft inquiry does not affect your credit score. It may show up on your credit report, but it will not lower your score even then. This makes soft inquiries always preferable to hard inquiries whenever you have the option.
In other words, as long as you cluster your inquiries all together, you can shop as many lender options as you’d like. This is wise, as it can ensure that you can get the best rates possible.
At the end of the day, hard pulls are worse than soft pulls when it comes to your credit. However, both are necessary parts of your financial activity, and neither one should have a major impact on your credit as long as you go about initiating credit pulls thoughtfully at all times.