What is the difference between a hard and a soft credit check? – Councilor Forbes
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It’s smart to check your three credit reports and do it often. Yet there is a difference between checking your own reports with Equifax, TransUnion, and Experian and allowing someone else to access your credit information. Some type of credit check, a thorough investigation, could hurt your credit rating. The other – a soft survey – will not affect these important numbers at all.
What is a credit check?
The term credit check describes what happens when someone requests and receives your credit information. The first step in the process involves a party sending a request for information or an “investigation” to one of the three credit bureaus. Then the credit bureau can share your credit report if the person or business making the request has the legal right to request it. The exception here is if you have placed a credit freeze on your data.
Federal law gives you the right to know who has accessed your credit information. A credit reporting agency should record every credit request (that is, a credit check or raffle) in your credit report. Most credit inquiries stay on your credit report for two years as a policy.
Difficult against. Soft credit check
Some credit checks are said to be “hard” while others are “soft”. The difference between the two terms is related to the impact of each type of request on your credit scores.
Firm credit check
Usually a credit check or inquiry takes place when you apply for something. When a serious investigation shows up on your credit report, there is a chance it could lower your credit score.
The following types of credit checks are examples of serious inquiries.
- Loan applications (mortgage, car, student, staff, etc.)
- Credit card applications
- Credit limit increase requests
- Line of credit applications
- New utility applications
- Apartment rental requests
- Collection agency skip tracing
Soft credit check
Flexible credit applications have no impact on your credit score. If a lender checks your credit report, flexible credit applications won’t show up at all. Indirect inquiries are only visible on consumer disclosures, that is, credit reports that you personally request.
The following types of credit checks are examples of indirect inquiries.
- Personal credit checks
- Pre-approved credit offers
- Insurance claims
- Reviews of accounts by current creditors
- Job applications
Rigorous credit checks and your credit scores
Why tough questions matter
When a lender gets your credit report, it is possible that your credit rating will go down. The reason that boils down to simple math. Statistics show that consumers who request a new loan are riskier compared to consumers who do not.
According to FICO, consumers with five or more credit applications in the past 12 months are six times more likely to be over 90 days past due on a credit obligation than consumers without any credit applications. People with six or more credit inquiries may be eight times more likely to file for bankruptcy than consumers without an inquiry.
Lenders and other businesses use credit scores to predict the risk of doing business with you. The FICO and VantageScore credit scores predict the likelihood that a consumer will default (that is, be more than 90 days late) on any credit obligation over the next 24 months.
If something on your credit report shows that you are more likely to default on a credit obligation, your score could drop. This is true of serious credit inquiries and any other action that increases your credit risk, such as taking use of credit card, late payments and other derogatory credit information.
How many points will a serious investigation cost you?
According to FICO, a new investigation will usually be reduce a credit score by less than five points. As this survey ages, the impact on your score should be less until it doesn’t count at all. Of course, the real credit scoring process gets a little more complicated when you break it down.
Difficult credit checks don’t count as much in calculating your credit score as other factors. With FICO scoring models, for example, credit inquiries influence 10% of your credit score. In comparison, your payment history is worth 35% of your FICO score. Concrete requests count even less in VantageScore credit scoring models. VantageScore only calculates 5% of your score based on serious surveys.
Individual credit requests do not have a specific point value at all levels. For example, you can’t say that a serious new request will lower your credit score by five points. This is not the way credit scoring works.
Instead, a credit scoring model takes into account the total number of requests that appear on your credit report along with the age of those requests. The rest of your credit information is also important. A serious new investigation could have a bigger impact on the score of people with lower credit histories compared to those with older, more established credit reports.
How long do inquiries stay to your credit?
Most credit reports are voluntary. For example, credit card issuers are not legally required to share customer information with credit bureaus. Credit bureaus are also not required to include credit card accounts on credit reports. Account information is flagged and included in credit reports as it helps affected businesses increase their bottom line.
The demands are different. Credit bureaus are required by law to disclose when giving anyone access to your credit information. According to the Fair Credit Reporting Act (FCRA), most inquiries should stay on your credit report for at least 12 months. Job applications should stay on your credit report for 24 months.
Typically, credit reporting agencies choose to keep inquiries about your credit reports for two years. Yet FICO only takes into account serious investigations that have taken place in the past year. Once a serious request is over a year old, it has no influence on your FICO score.
VantageScore is once again more lenient when it comes to surveys. If a serious investigation lowers your VantageScore credit score, it will usually rebound in three to four months (provided no new negative information appears on your credit report).
The rate purchase exception
As mentioned, some serious inquiries can hurt your credit score. Frequent credit inquiries indicate higher risk and could be a sign that you are in financial difficulty. Buying rates, however, is an exception to the rule.
When you take the time to research the best interest rate before taking out a new loan, it shows financial responsibility, not higher risk. Since rate buys don’t indicate you’re more likely to default, both FICO and VantageScore include special logic in their credit scoring models that treat these types of claims differently.
This special logic is known as deduplication. Here is an overview of how it works.
- 45 day Safe Harbor period: FICO considers all student loan, auto loan and mortgage inquiries in one request, provided they occur within 45 days. Older versions of the FICO scoring models (which some lenders still use) have a 14-day window instead.
- 14 day Safe Harbor period: VantageScore treats all requests that occur within a 14 day window as one request, regardless of the type of request.
It is wise to review your three credit reports regularly. Checking your credit can help you watch for fraud and credit report errors that could lower your credit scores. Through FCRA, you can request a free copy of all three credit reports once every 12 months from AnnualCreditReport.com.
When looking at any of your credit reports, you should look for errors and fraudulent information. This includes looking for credit inquiries that have taken place without your permission. If you discover unauthorized credit inquiries, you have the right to dispute them with the credit bureaus. This guide of the Federal Trade Commission can help you navigate the process.
Claims that you don’t recognize may indicate a bigger problem than a simple credit report error. Unauthorized credit checks could be a sign of identity theft. If you discover any suspicious inquiries on a credit report, carefully review the rest of your credit information for any other indication of fraud. Visit IdentityTheft.gov for help reporting and recovering identity theft if you are a victim of this crime.
Serious credit checks usually have a minor impact on your credit scores, if at all. Yet just because credit applications are less influential than other credit scoring factors doesn’t mean they don’t matter.
You don’t have to worry about check your own credit. These flexible credit checks will never hurt your credit score. But it is wise to limit credit checks as much as possible.
Applying for credit occasionally will likely have little impact on your credit score. Responsible rate purchases for student loans, auto loans or mortgages within 45 days are also suitable. However, if you apply for many new accounts in a short period of time, your credit scores may take a wrong turn, which may require you to build your credit to safeguard.