Hard vs. Soft Credit Check: What’s the Difference?
Our credit scores don’t tell the whole story of our financial history. But they give lenders, landlords, and potential employers an idea of how we manage our finances. Here we will discuss some of the reasons parties check our credit scores and the difference between hard and soft credit checks.
Strict credit checks or not
If a person or business wants to apply for credit, determine whether it will be a firm credit check or a soft credit check before accepting. Here’s why: Hard credit has an impact on your credit score, while poor credit does.
Whether you’re asking for a credit card offer, a car loan, or meeting a potential employer, you decide if you want to have your credit score checked. Once you understand the difference between a firm credit check and a flexible credit check, you’ll be in a better position to decide what’s in your best interest.
What is a strict credit check?
A rigorous credit check is when a creditor takes a deep look at your credit history. This happens when you apply for something that requires a decision, such as a loan or a credit card.
Every time a hard draw is made, your credit score is affected. The good news is that these dings are not very important. According to Experian, one of the three major credit bureaus (along with TransUnion and Equifax), a FICO® score typically drops by five points or less for a rigorous credit check. These firm checks remain on your report for two years.
Many events generate rigorous credit checks. For example, hard credit is made when you:
Avoid multiple credit checks
Each time a credit check is performed, a note is added to your credit report. A creditor can get nervous when they see several recent credit inquiries on your credit report.
One way to avoid multiple credit applications is to apply for multiple loans (of the same type) in a short period of time. Credit bureaus know that you are probably going to be looking for the best loan, so they count multiple credit inquiries for the same type of loan as one inquiry, provided they are completed within a certain time frame.
The time varies depending on the credit scoring model, but ranges from 14 to 45 days. If you are thinking of shopping around for the best loan, play it safe by having all credit checks run within two weeks.
An example of a credit check: Let’s say you want a new rewards credit card and learn that your credit union offers a card with some great benefits. You complete a credit application and talk to the card issuer a little bit about yourself, including your name, address, location of work, and how much you earn. These are all crucial factors, but the card issuer really wants to take a look behind the curtain. They want to know the details of your financial history. They therefore do what is known as a “tough draw” or a “tough credit check”. This force of attraction allows them to delve into your credit report by ordering a copy from a credit bureau.
The credit card company learns which financial institution gave you the credit first, your payment history, and your credit rating. Between your loan application and your credit report, the credit card company gets a glimpse of your financial past.
They also get a feel for how you’ve managed your credit by pulling a VantageScore or FICO® score. Although FICO is the most commonly used credit scoring model, both are three-digit numbers designed to provide insight into your financial behavior. The higher the three-digit number, the better your financial reputation.
What is a flexible credit check?
A gentle credit check is a review of your credit report. For various reasons, individuals or organizations simply want to assess your creditworthiness. Since you are not actually applying for something that requires a decision, a soft credit appeal has no impact on your credit score.
There are many reasons for performing a gentle credit check. Some of the people and companies who can do one include:
The owners: To judge your ability to pay rent on time, landlords can do a soft or strict credit check.
Potential employers: Before hiring you, an employer may want to determine your financial responsibility and general money management skills.
Credit card issuers: Always on the lookout for new customers, these plastics suppliers may want to check your profile to determine if you are a safe risk for any of their cards. In credit card business, this is called “pre-approval”. This should not be confused with what happens after filling out a credit card application. The pre-approval leads to a soft credit draw. Once you confirm your interest, the credit card issuer performs a hard credit check.
Insurance providers: Much like credit card issuers, they may have determined that you are fiscally responsible enough to be pre-approved for one or more of their products.
You: When you self-check your credit profile, it is always an indirect request.
Unlike a physical check, the person or business performing the credit check does not necessarily need to get your authorization to do so. Whether they do or not depends on the nature of the control. For example, pre-approved credit card offers don’t require authorization, but your prospective future employer does.
This is required by law. The federal Fair Credit Reporting Act states that only entities with a “valid need” can access a copy of your report.
So don’t worry if someone gets their hands on your report and disseminates it to the world. Only those who have a valid reason to take a look should be able to take a look.