Along with credit cards, some of your greatest, if not the most major financial tool you have, is your credit report and your credit score. That magical number, with its history, can tell anyone if you are a responsible, low risk person to lend money. It can also tell someone if you are a high risk.
For someone to find this information, they must pull your credit. This can be done via a hard credit check or a soft credit check. Let’s discuss both and see why someone may want to pull this type of information and what can be done about it. Your credit report is personal information, and you have a right to let someone see or not see it. But that does not guarantee lenders will lend to you without seeing it.
According to Bank Of America, “A soft credit inquiry is when your credit report is checked, but you haven’t applied for credit.” This can be done when you inquire about your credit with one of the major reporting bureaus or use special online tool which pulls them for you.
This is also done when people are looking to assess what type of person you are and if you can bring risk. Employers can pull your credit to see if you have financial troubles and would be willing to steal if you had unlimited access to company funds. They usually only do this if you are working with money or accounts payable and receivable. Landlords may look at your credit to see if you are a responsible renter. If you have eviction notices, lost your home to a foreclosure or claimed bankruptcy, this may peak their interest.
Renting a car may also require a soft credit check or at least a credit card on file with a deposit of $250. Sometimes you are borrowing up to $20,000 on four wheels, so they need to see what kind of person is driving off the lot. If you do not have a credit card or have a bad credit score, there may be other more costly options for you to proceed.
Soft credit checks are also done when financial companies are randomly looking to see who they can extend new credit opportunities to, and you happened to fit their criteria. A “pre-approved” offer does not mean you are guaranteed the funds since you did not submit to a hard check.
A hard credit inquiry, or check, is when you are applying for credit or a loan. Financial institutions leave a note on your credit stating that you were or are looking for an open line of credit. This is to let other institutions know your history. One check is going to look better than ten checks, especially because each hard check takes a few points off of your credit score.
Hard checks are done with serious inquiries about loans and open lines of credit, such as auto, credit cards, and mortgages. This why it’s important only to do hard checks when you are serious about borrowing money or have no other options to finance something. It may be ridiculous to save for an entire home loan rather than get a mortgage, for example.
It’s important to know that the opening of any financial account would most likely pull your credit and leave a hard check. Banks will check your credit to see if you have overdrawn any accounts. Failure to pay fees or loans may result in being reported to ChexSystems, a database that keeps track of who can or can’t open a regular checking account. Almost all major banks use ChexSystems and will also pull your credit to see what kind of account they may offer you.
Financial institutions aren’t the only ones who will check your credit to see what kind of risk you are before opening an account. Utility companies can also pull your credit to see if you have any delinquent accounts and if you are to require a deposit going forward for services. Most deposits for utility services, if you have bad credit, are the highest the bill has ever been for that particular residence. So if an electric bill has been $300, which could be your deposit.
Along with utility companies, keep an eye out when shopping for a new phone. Cell phone providers also check your credit since you are opening an account with them and getting a smartphone, which costs over a few hundred dollars. The bigger you risk, the more of a deposit you are going to be required to put down before you walk out of that store.
Soft checks do not hurt you as they are to gather information for non-lending purposes. This is why they are “soft.” Hard checks, if too many, can hurt you dependent on other factors. If you are rate shopping, have an already high credit utilization rate or have few accounts, this can seem like a red flag. It can also hurt if you have a low score, to begin with. It’s going to hurt more if you have a credit score of 450 rather than 750. Hard checks can also stay on your credit for up to two years so apply wisely for credit offers.
If you are trying to rate shop for something like a mortgage or auto loan, do so on a 15-45 day timeline, according to My Fico. This will allow all credit checks to show up on your credit as one check instead of multiple ones and will not hurt you as much. If your credit tanks, however, it can mean that companies can charge you interest rates through the roof.
You can limit checks on your credit by being smart when opening and applying for new accounts.
Hard and soft checks on your credit do not have to be the end of the world for you. By only allowing checks when needed, not taking out additional credit cards or loans and practicing good financial habits, this will be just another financial rule of thumb that happens when needed.