When applying for credit, you may come across the terms “hard credit check” and “soft credit check.” These are two different types of credit checks that lenders use to determine your creditworthiness. It’s essential to understand the differences between them, as they can affect your credit score.
A hard credit check, also known as a hard inquiry, is a comprehensive review of your credit report. This type of credit check happens when you apply for credit, such as a credit card, personal loan, or mortgage. Lenders use hard credit checks to determine your credit risk and decide whether to approve your application. Hard inquiries can negatively impact your credit score by a few points, and they stay on your credit report for up to two years.
Here’s an example of when a hard credit check may occur. Suppose you’re looking to buy a new car and need to finance it with an auto loan. The lender will likely perform a hard credit check as part of the application process to assess your creditworthiness and determine the loan’s terms.
On the other hand, a soft credit check, also known as a soft inquiry, is a less invasive review of your credit report. This type of credit check happens when you or someone else, like a potential employer, checks your credit report for informational purposes. Soft inquiries don’t impact your credit score and aren’t visible to lenders or creditors.
Here’s an example of when a soft credit check may occur. Suppose you’re checking your credit report to monitor your credit score or applying for pre-approval for a credit card. In that case, the lender may perform a soft credit check to determine your eligibility for the offer.
So how should someone use this in their daily lives? It’s essential to understand when a hard credit check will occur and try to limit them to only necessary applications. Too many hard inquiries in a short period can negatively impact your credit score. On the other hand, you can check your credit report regularly with a soft credit check without worrying about damaging your credit score.
In conclusion, understanding the difference between hard and soft credit checks can help you manage your credit score and protect your creditworthiness. Limiting hard inquiries and regularly monitoring your credit report with soft inquiries can help you maintain a healthy credit score and financial standing.