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In the United States, having a good credit history and a high credit score is essential. It is important to understand when a soft and a hard credit check will be required.
Though it may seem strange, it is a good mental exercise to visualize your credit score as a cake that represents your financial health.
This cake has now been cut into several slices, each representing a specific factor of your credit score. A large slice represents your current credit card utilization rate, while a smaller one represents the percentage of your on-time payments. Another slice represents the length of your credit history, and a third represents the number of negative indicators.
As a final step, we come across a small portion that represents the hard and soft credit inquiries that companies and lenders have conducted on you. Keeping applying for more credit results in a “little bite” of this pie each time.
It is probably at this point that you are wondering, what exactly does a credit investigation entail? Moreover, what does hard credit mean? How does soft credit work? How does it affect your credit history? Nevertheless, we have compiled for you all the necessary information on this subject. Let’s get started!
Page Contents
First of all, what is a credit inquiry?
What is the process of a credit investigation?
Credit inquiries are an important part of the credit market. As a matter of fact, “hard” inquiries are an essential part of the underwriting process for all types of credit, while “soft” inquiries are used by finance companies to market their products.
What are hard credits?
It’s possible that a hard credit check will lower your credit score by a few points or, in the end, have a negligible effect.
A single application is unlikely to have a significant impact on the approval of a new credit card or loan.
Before the investigation is finished, the damage to your credit score often lessens or disappears.
Doesn’t sound so bad, does it? However, you may want to think twice about applying for a number of credit cards at once or even a few months from now.
If you have several such inquiries within a short period of time, lenders and credit card issuers may view you as a higher risk customer, suggesting you may be short on cash or planning to rack up a large amount of debt . . .
Therefore, you should consider spreading any credit or loan application over time.
Keep Reading: FICO vs. Experian vs. Equifax: What’s the difference?
Do you know what a hard credit investigation is?
A hard credit inquiry (also known as a “hard pull” or “hard inquiry”) usually occurs when a financial institution, such as a lender or credit card issuer, investigates your credit history before making a loan decision. A mortgage application, a loan application or a credit card application will usually require a credit check.
That doesn’t sound so bad, does it? Consider twice before applying for a handful of credit cards at once, or even over the course of a few months. You may be considered a higher risk customer if you make multiple inquiries within a short period of time, suggesting that you might be short of cash or preparing to rack up a lot of debt. Consider the possibility of extending any credit or loan application over time.
FAQ: How long does a hard credit inquiry stay on my credit report?
Answer: Hard credit inquiries generally remain on your credit reports for two years.
What are soft loans?
Are you aware of soft loans? Well, yes, they do exist and they are intended to support you. But what are they exactly?
Here is what they are:
In this context, the lender offers the borrower optimal conditions to access a loan, which are typically not available in the market. Mainly, the lender offers the following:
- Low interest rates: The interest rate offered by these types of credit is much lower than the rates offered by traditional banking institutions. The rate is typically 10%, although it can vary.
- Long repayment terms: This means smaller payments and a longer repayment period.
The two characteristics are generally present, but other types of benefits may apply depending on the purpose of the credit.
Who and why grants such good credits?
One very important aspect of this type of credit is that it is not granted by private institutions, but by public ones, i.e., government-funded. Credit of this kind seeks to benefit society instead of profiting from it.
I’m sure you remember what happened with the September earthquake that affected many people and now they have no roof over their heads. Due to this, the Ministry of Finance and the Ministry of Finance and Public Credit have addressed the issue and will offer soft loans to those who need them.
This is also true of the SME Fund. Program run by the Ministry of Economy, which provides loans, training, advice and more services to micro, small and medium enterprises with the intent of creating more jobs. People over 68 can also apply for loans.
Keep Reading: What is APY (Annual Percentage Yield)?
Characteristics of soft loans
Soft loans have the following characteristics:
- Most of its features are related to the favourable conditions, such as low interest rates or long repayment terms.
- It is usually a public financial institution that provides soft loans, since they are not intended to generate profit. Due to this, private financial institutions do not usually offer this type of credit (since their main objective is to maximize profits), although sometimes public entities encourage private banks to grant soft loans.
- Usually, the granting of these credits is based on a social objective. This is why it is often said that soft loans are disguised subsidies.
Soft loans otherwise have the same formal characteristics as other loans.
Purpose of soft loans
Previously, we have noted that soft loans do not have an economic objective, which means their main objective is not to generate profits. The main feature of these credit lines is their favourable financing conditions, and this makes sense.
The main purpose of soft loans is therefore usually social, favouring certain agents. You can think of many examples of this: soft loans for companies (conditional on making a series of investments), soft loans for people with certain economic difficulties, etc. Because of all these reasons, soft loans are usually granted from government funds, either directly by public financial institutions or indirectly through private financial institutions.
In contrast to hard inquiries, soft inquiries will not impact your credit score. Depending on the credit bureau, they may or may not appear on your credit reports. Since soft inquiries aren’t associated with a specific credit application, they are only visible when you view your credit report.
FAQ: Will checking my own credit score lead to a harsh investigation?
Answer: No. Since this is considered soft research, your score won’t be affected.
Keep reading: What is the Annual Percentage Rate (APR)? How it Works?
Hard and soft credit inquiries examples:
If you gave permission, you can be sure that a hard credit check was conducted. Otherwise, you should consider it a soft credit check.
Here are some examples of when a hard or soft credit inquiry may appear on your credit report. The following lists are not exhaustive, and should only be used as a general guide.
Hard inquiries into credit
- Applications for mortgages
- Auto Loan Applications
- Requests for credit cards
- Requests for student loans
- Requests for personal loans
- Requests for apartment rentals
A soft credit investigation
- You can check your credit scores on any website or institution that offers these services
- “Pre-approved” credit cards
- Quotes for “Pre-approved” Insurance
- Background checks performed as part of the hiring or employment process
You should also keep in mind that there are other types of credit checks that may appear as hard or soft inquiries. Providers of utility, cable, internet, and cell phone services often check your credit.
If you’re uncertain whether an inquiry will be classified as a hard or soft credit inquiry, you can ask the company, credit card issuer or financial institution involved.
Important factors to consider:
A hard credit investigation provides the creditor with a complete credit report with information about the credit score and much more. Truth be told, some lenders and institutions place more emphasis on a borrower’s credit score than others, along with scoring ratios serving as a component of the credit application approval process.
How does hard inquire impact your Credit Score?
There is no specific point value attached to credit inquiries in FICO credit scoring models. The number of “hard” inquiries on your credit report in the past 12 months is what matters most for your credit score. In this sense, an inquiry can affect your FICO score by up to five points. You should, however, keep the effects of investigations in perspective.
Currently, hard credit inquiries only affect 10% of your FICO score and 5% of your VantageScore. The best way to limit research is to limit the number of inquiries you make. However, as long as you use it responsibly, don’t be afraid to apply for new credit.
Do you know if it is possible to avoid a hard credit investigation?
It can be frustrating if you’re trying to build (or rebuild) your credit to find that applying for a credit card has a slight negative impact on your scores even if you’re approved. You should know, however, that a hard credit check is part of the loan application process.
It can be tempting, then, to try to “hack” the system, for example, by applying for several credit cards simultaneously in the hope that several will be approved and appear in a single application. While it is possible to get lucky and have your tactics work in your favour, we do not recommend it.
As long as you are not applying for multiple loans, it shouldn’t be necessary to avoid hard credit inquiries. As long as you’re responsible with your credit, they won’t affect your scores in the long run.
Keep Reading: How to know the balance on my credit card?
What to do if you have a Hard Credit Inquiry?
In order to avoid any inconvenience, we recommend that you check your credit reports regularly. Consider disputing errors with the credit bureau if you spot errors, such as a hard investigation that was done without your consent. For further assistance, contact the Consumer Financial Protection Bureau (CFPB).
Experian, one of the three major credit bureaus, says that if you see activity you don’t recognize, it could be a sign of identity theft. It’s a matter of understanding what’s going on and investigating it at the very least.
Hard credit inquiries that take place without your permission cannot be disputed, so if you’ve authorized one, it typically takes two years for it to disappear from your credit report.
What you can do to minimize the impact of hard credit inquiries?
If you’re looking to buy a home or car, don’t let the fear of hard credit inquiries stop you from making purchases, especially if they have a low interest rate.
Consumers have a grace period of 30 days before certain loan applications are reflected in their FICO® Credit Score. Additionally, FICO records multiple applications for the same type of loan as one application, as long as they are made within a certain period of time.
For FICO scores calculated from older versions of the scoring formula, this window is 14 days; for FICO scores calculated from the most recent versions of the scoring formula, it is 45 days.
The VantageScore model also provides a two-week window to search for the best interest rates for certain loans. As a result, your credit score is only affected once, the company states.
Keep Reading: How Capital One Venture Card points work?
Additional ways to reduce credit inquiries’ impact:
You request loans sporadically
Making sure you don’t apply for too many loans at the same time is the easiest way to prevent credit inquiries from affecting your credit score.
Research different interest rates for auto loans, student loans, credit cards, or any other type of loan. You may not be aware, but there are a lot of websites and institutions that can give you the best deal on a one-time loan. The Even Financial site is a great example of this. It provides you with a list of the best loans tailored to your specific needs.
Improve other aspects of your presentation
Credit inquiries can lower your score by three or five points (per inquiry), but overall they have little effect. A large part of your credit score is determined by your credit utilization rate(that is, how much credit you have available). The lower it is, the better. It is recommended to keep it below 30%. In other words, you shouldn’t exceed your credit limit each month.
On the other hand, the length of your credit history is also an important deciding factor, so be sure to carefully consider whether or not you should close your credit card accounts, if you have even considered it.
Summary
In terms of your financial well-being, your credit score is crucial. Therefore, before applying for credit, you should build your credit score. You can increase your chances of getting approved for a loan with the best possible terms and rates when you have stronger credit.
Keep track of soft and hard credit inquiries, especially since the latter can affect your credit score. Check your credit reports regularly. However, you have to remember that while one hard inquiry can knock you down a few points, more inquiries in a short period of time can be even more damaging.
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