The Difference Between Hard and Soft Credit Inquiries

Understanding all the factors that can affect your creditworthiness is crucial when navigating the complicated world of credit. The type of credit inquiry that lenders conduct while evaluating your credit history is one such consideration. Credit inquiries, which are frequently divided into “soft” and “hard” categories, are very important in assessing your credit score and general financial health.

Understanding Hard Credit Inquiries

Hard credit inquiries, also known as hard pulls or hard checks, usually occur when a lender or financial institution reviews your credit report as part of their evaluation process for a credit application.

Hard Credit Inquiries: When and Why Are They Typically Done?

Hard credit inquiries are generally conducted when you apply for new credit, such as a credit card, mortgage, auto loan, student loan, or personal loan. Lenders use these inquiries to assess the level of risk associated with extending credit to you. By reviewing your credit report, they gain insights into your payment history, existing debts, and overall credit management behaviour.

Lenders typically perform hard inquiries to evaluate your creditworthiness and determine if you meet their lending criteria. They want to ensure that you have a track record of responsible borrowing and that granting you credit aligns with their risk appetite. Hard inquiries are an integral part of the underwriting process and help lenders make informed decisions when extending credit to applicants.

How Long Do Hard Inquiries Stay on Credit Reports in Australia?

In Australia, hard credit inquiries remain on your credit report for five years. Multiple hard inquiries within a short period may indicate that you are actively seeking credit, which could be seen as a sign of increased financial risk.

While a single hard inquiry typically has a minor impact on your credit score, it’s important to be mindful of accumulating too many within a short span. A high number of hard inquiries can have a more significant negative impact on your creditworthiness and suggest that you may be taking on too much debt or experiencing financial difficulties.

Understanding Soft Credit Enquiries

Soft credit inquiries, often referred to as soft pulls or soft checks, occur when a person or entity accesses your credit report for informational purposes. Companies will need authorisation to do a soft credit check.4

Examples of Entities that Perform Soft Credit Inquiries

• Personal Credit Checks: Individuals may perform soft inquiries on their credit reports to monitor their financial standing and track any changes.
• Pre-Approved Offers: Credit card companies, lenders, or insurance providers may conduct soft inquiries to determine if you meet their initial criteria for pre-approved offers. These offers are typically based on broad eligibility criteria and do not guarantee credit approval.
• Background Checks: Employers may conduct soft inquiries as part of background checks to assess an applicant’s overall financial responsibility and assess the risk associated with hiring them. However, explicit consent is typically required for these inquiries. Source: NerdWallet
• Account Reviews: Financial institutions, such as banks, credit unions, and online lenders, may conduct soft credit inquiries as part of their account review processes. This allows them to assess your creditworthiness and determine whether you qualify for certain products or services, such as credit cards, loans, or overdraft protection. Source: Experian

Soft Credit Inquiries: When and Why Are They Typically Done?

Soft inquiries are often conducted for preliminary assessments of creditworthiness. This type of credit inquiry is also done for informational purposes, such as personal credit checks. Individuals may review their credit reports to understand their financial standing, identify areas for improvement, or track changes in their credit history.

Take note that soft inquiries are not tied directly to credit applications, and their purpose is to provide information rather than make lending decisions. They do not impact your credit score or creditworthiness, making them valuable tools for individuals and entities to gather insights without any negative consequences on credit profiles.

Differences Between Hard and Soft Credit Enquiries

Understanding the differences between these two types of credit checks is crucial for managing your credit health effectively. Let’s explore the key distinctions:

Initiation: Consent and Permission Requirements Hard Credit Inquiries

Hard Inquiries: Requires your explicit consent and are typically initiated by lenders when you apply for credit. Your authorisation is necessary because hard inquiries involve a thorough review of your credit history.

Soft Inquiries: Do not require your explicit consent since they are often initiated by individuals or entities for informational purposes only.

Credit Score Impact: Temporary Negative Impact vs. No Impact

Hard Inquiries: This can have a temporary negative impact on your credit score. Each hard inquiry typically lowers your score by a few points and remains on your credit report for a certain period, typically up to two years. However, the impact of a single hard inquiry is generally minor and diminishes over time.

Soft Inquiries: Do not impact your credit score at all. Soft enquiries also have no impact on loan decisions and are only available to you when reviewing your credit report.

Purpose: Credit Applications vs. Background Checks and Pre-Approvals

Hard Inquiries: Primarily associated with credit applications. The purpose of hard inquiries is to determine whether you meet the criteria for extending credit.

Soft Inquiries: These serve different purposes, such as background checks or pre-approvals. Employers may conduct soft inquiries to assess your financial responsibility. Additionally, lenders and credit card issuers may perform soft inquiries to determine if you meet the initial eligibility criteria for pre-approved offers. Soft inquiries provide information for assessment purposes without directly impacting your creditworthiness.

Visibility on Credit Reports: Visibility to Lenders vs. Visibility to the Individual Only

Hard Inquiries: Visible to other lenders and creditors who review your credit report. This visibility allows them to assess your recent credit activity and make informed decisions regarding extending credit. Multiple hard inquiries within a short period may raise concerns for lenders, as they may interpret it as a sign of increased financial risk.

Soft Inquiries: Only visible to the individual who requests their credit report. They are not shared with lenders or other third parties, and therefore, do not impact lending decisions or the assessment of creditworthiness.

Importance of Knowing the Difference

Understanding the distinction between hard and soft credit inquiries is essential for several reasons:

• To be able to protect your credit scores from negative impacts

Hard inquiries have the potential to temporarily lower your credit score. By being aware of when and why hard inquiries occur, you can minimise unnecessary credit applications and avoid accumulating multiple hard inquiries within a short period. Strategic management of hard inquiries helps protect your credit score and enhances your creditworthiness.

• To be aware of who is accessing your credit information and for what purpose

Knowing the types of inquiries being made on your credit report allows you to monitor who is accessing your credit information. Soft inquiries are typically initiated for informational purposes or preliminary assessments, such as background checks or pre-approvals. Being aware of these inquiries ensures you can identify and verify the entities that are reviewing your credit information.

• To manage credit applications strategically

Knowledge of the different types of inquiries helps you manage credit applications strategically. By understanding the purpose of hard inquiries and the visibility they have on your credit report, you can make deliberate choices about when to apply for credit. This allows you to optimise your chances of approval and maintain a healthy credit profile.

Best Practices for Managing Credit Inquiries

Effectively managing credit inquiries is crucial for maintaining a healthy credit profile and maximising your creditworthiness. Here are some best practices to consider:

• Limit hard credit inquiries by being selective in credit card applications

To minimise the potential negative impact on your credit score, be selective when applying for credit. Only pursue credit options that you genuinely need and carefully evaluate your chances of approval before submitting applications. This helps avoid accumulating multiple hard inquiries within a short period.

• Regularly monitor your credit reports for accuracy and unauthorised inquiries

It’s important to review your credit reports regularly to ensure accuracy and identify any unauthorised inquiries. By monitoring your credit reports, you can detect potential errors or fraudulent activities early on and take appropriate action to address them. Reporting any inaccuracies or unauthorised inquiries to credit reporting agencies is crucial for maintaining the integrity of your credit profile.

• Use pre-approval offers and soft credit checks for initial assessments

Pre-approval offers and soft credit checks can provide valuable information without impacting your credit score. Take advantage of pre-approval offers to assess your eligibility for credit products before submitting formal applications. Soft credit checks can also be useful for initial assessments, allowing you to gauge your chances of approval without affecting your creditworthiness.

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• Seek professional advice

If you have complex credit situations or are unsure about the impact of inquiries on your creditworthiness, it can be beneficial to seek professional advice. Credit counsellors or financial advisors can provide guidance tailored to your specific circumstances and help you make informed decisions regarding credit inquiries and overall credit management.

Conclusion

Understanding the differences between hard and soft credit inquiries is important to effectively manage your credit health.By knowing the distinction between these inquiry types, you can protect your credit score from unnecessary negative impacts and learn how to strategically manage your credit applications.

Remember, knowledge and proactive management are key to ensuring your credit health remains strong. By staying informed, making strategic choices, and monitoring your credit activity, you can navigate the world of credit with confidence and achieve your financial goals.