How a Soft or Hard Credit Check Can Affect Your Finances

If a reliable friend asks you for money, you might think nothing of lending it to them because you know they’ll pay you back. But what if you don’t know them well? In that case, you want to gather information to find out how likely they are to pay you back before making your decision. This is the fundamental principle behind a credit check; it’s an inquiry into your financial reputation.

What is a credit check?

As we discussed in our Credit 101 article, your credit is your capacity to borrow an asset, whether it’s borrowing money from a credit card company to pay for things up front or “borrowing” living space from a landlord every month. Your credit is measured by your credit score, which represents how likely you are to repay what you borrow.

When you apply for a credit card or apartment lease, you’re essentially asking to borrow something with a contractual promise to pay it back. Before bank lenders and landlords agree to that, they need to know if they can rely on you to pay them back. To find out, they check your credit score, if not your entire credit report. This is what is known as a credit “check,” “inquiry” or “pull” (because they “pull up” your credit report to see how often you pay off debt and whether you have any derogatory markers such as past due bills, foreclosures or charge-offs.)

The difference between a hard credit check and a soft credit check

Not all credit checks are created equal. There are “hard” credit checks and “soft” checks, which happen for different reasons with different impacts to your credit score. It’s important to understand the differences to keep your credit score healthy.

Hard inquiry

  • When it occurs: When lenders evaluate a specific application from you for money and asset-lending situations such as:
    1. credit cards and credit line increases
    2. car purchases and leases
    3. mortgages
    4. student loans
    5. apartment leases (could be hard or soft)
  • Requires your permission: Yes
  • Impact: Can temporarily lower your score by up to five points per check; multiple checks in a short period can lower it even more
  • Visibility: Visible to you and other lenders checking your report for up to two years

Soft inquiry

  • When it occurs: For reasons unrelated to direct money lending, such as:
    1. loan prequalifications
    2. promotional offer and insurance premium qualifications
    3. employment background checks
    4. setting up utility services
    5. self-requested credit reports
  • Requires your permission: No
  • Impact: None, because you’re not actively asking for anything
  • Visibility: Only visible to you on your report for up to two years, often less

Why a hard inquiry can lower your credit score

Let’s go back to the friend example we started with. If, in your research, you discover that the person asking you for money has also asked a lot of other people for money or for large amounts, that may be an indication that they are often in need of money or have compulsive buying behavior. Thus, they might be less likely to pay you back in full. Having a lot of checks on your report conveys the same idea of unreliability, and that’s why it lowers your score.

How to minimize hard checks and damage to your credit score

All too often, people ignore credit monitoring until their loan or credit application is rejected. But lenders, insurers, some employers, and other businesses use your credit score to decide if they want to do business with you — and the terms they’ll offer you. That’s why it’s essential to proactively understand when and why a hard credit check is going to happen and avoid it if possible. Here are a few ways to do that:

  1. Monitor your credit score regularly and dispute any unauthorized transactions. You can get a free credit report once a year from each of the three credit bureaus, Experian, TransUnion, and Equifax, at AnnualCreditReport.com, and you can check your scores once a week—they can even send you weekly alerts.
  1. Be picky. Only submit a credit application if you really need it—don’t apply for credit cards and other financial programs lightly, even if the cash back and points deals seem good. Deeply research what you want and make sure it will work for you in the long term.
  1. Submit applications close together. If you want to comparison shop for a good interest rate, submit multiple applications at once to reduce your total hard inquiry number. According to Experian, FICO will count multiple inquiries as a single inquiry if they all occur within 45 days or so.
  1. Negotiate. If you’re applying for an apartment lease, ask the landlord or management company to perform a soft credit check instead of a hard credit check so it won’t affect your score. This question in and of itself shows that you’re conscientious about your finances.
  1. Keep your credit frozen by default. If a bad actor gets their hands on your social security number, they can submit a credit application in your name, resulting in a hard inquiry, or worse, multiple hard inquiries. Why leave your credit exposed? Instead, freeze your credit with each bureau by default, and only unfreeze it when you know you have a hard check coming. It’s easy to do—just log into the bureau’s website or app and choose the option to freeze your credit.

What’s next?

By staying informed and regularly reviewing your credit report, you can protect your financial reputation and make smarter borrowing decisions. To learn more about credit, take a deep dive into frequently asked questions about how it works, how to build and maintain good credit, and how to repair bad credit in our Credit 101.

Maspeth Federal Savings is committed to providing financial education to help customers understand and manage their credit with confidence. Visit our Financial Wellness page to learn more about the programs and seminars we offer.