Understanding what does, and does not, affect your credit rating (hard pulls vs. soft pulls)
When it comes to credit scores (the three-digit number that essentially estimates how likely you are to repay borrowed money and pay bills), one of the biggest myths continues to revolve around the impact of checking it. Many people have come to believe that checking their own credit score will diminish it and that checking it frequently will cause significant damage.
This is false, in fact, financial professionals suggest that you check your credit score regularly to ensure your credit report is accurate.
So how did this misconception originate? The reality is that certain inquiries can hurt your score. But, not all.
When prospective lenders check your credit rating, your score can take a temporary hit. That's because the inquiry signifies that you are looking to take on more debt. When you apply for a loan or credit card, you authorize the lender to check your credit. This is what is known as a hard inquiry (also known as a hard pull). But when you check your own credit score, it's a soft inquiry or soft pull.
The difference between hard and soft credit pulls
If you've applied for financing or other credit, lenders will need to assess how you've handled credit in the past, how often you've paid your debts and bills on time, and whether you have any derogatory marks on your credit reports. In addition, they will investigate how much credit you've juggled in the past and how long you've been managing your credit. This process represents a hard credit pull.
But checking your own credit report to make sure everything is up-to-date and error-free is not part of that process. Thus, it's a soft credit inquiry or soft pull. Another type of soft credit pull occurs when a credit card company checks your credit to see if you qualify for certain offers or promotions. Your employer may also run a soft inquiry before hiring you. Regardless of the reason why, soft inquiries won't affect your credit score and often are not even visible on your credit report.
Hard inquiries typically occur if you have applied for a mortgage, auto loan, credit card, personal loan, student loan or if you've applied to rent an apartment. Common soft inquiries are you checking your own score on sites like Credit Karma, prequalified offers from credit card or insurance companies, or employment verifications/background checks.
The impact of hard and soft credit pulls on your score
A hard inquiry can lower your score by a few points, although, a single hard inquiry will have little impact on your ability to qualify for credit. And over time, the impact of the inquiry will decrease and will eventually disappear. However, if you apple for multiple credit cards in a short period of time, you may appear to be a higher-risk customer. So think about spreading out your credit card applications.
Minimizing the impact of hard pulls on your credit score
If you're sitting there reading this and thinking you need to limit the number of places you shop at for the best rate on a mortgage, car loan or the like, don't worry. While it's true that multiple hard pulls occurring within a short period can pull down your score, there are exceptions. For example, if you make multiple inquiries for the type of the loan, i.e. mortgage or auto, the inquiries may likely be viewed as one as long as they are made within a certain window- typically about 14 days.
The value of regularly checking your credit score
There are many good reasons for checking your credit report regularly. Primarily, you want to ensure it is accurate. If you can see that a hard inquiry occurred without your permission, you can likely dispute it with the credit bureau. If you don't receive satisfaction there, you can also contact the Consumer Financial Protection Bureau (CFPB) for further assistance.
Errors on your credit report may also be a sign of identity theft. So you want to be sure to track down the origins of anything outside the ordinary, keeping in mind that you can only dispute hard inquiries that occurred without your permission. If you authorized a hard inquiry, it generally takes about two years to fall off of your credit reports.
Another good reason for checking your score is to know where you stand in the eyes of a potential lender. Before applying for a mortgage or other sizable loan, it's good to know your score as this will help you qualify for the best rate and terms which will, in turn, affect your monthly payments.
Other common myths regarding credit scores
We've already addressed the most common misconception about credit scores and that's the fact that checking your own score has no impact on the number. Unfortunately, there are other myths that continue to interfere with consumers' abilities to make smart financial decisions and maximize their credit scores. These include:
- Closing credit card accounts will improve your score. Although paying down debt is important to improving your score, closing accounts can actually hurt you because it adversely affects your credit utilization ratio. Creditors typically like to see that you can use credit responsibly, so it's recommended to keep at least a few lines of credit or accounts open.
- Income and assets affect your credit score. This is not true. Even though lenders are interested in confirming that you have sufficient resources to pay off your debt, credit bureaus do not factor in assets or income when determining your credit score.
Now that you have a better understanding of what truly affects your credit score and what does not, you can more effectively work to build the best score possible. Watch for our next blog in which we will outline steps you can take to maximize your credit score.
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