What is a soft and hard inquiry and how does it affect your credit score? | Mint

To build and maintain a good credit score, you must access your credit report and score and monitor it regularly. Similarly, when you apply for a credit product, the financial institution has to access your credit report and score. Depending on who accesses your credit report and score, you or the financial institution, and under what circumstances, determine whether it is a soft or a hard inquiry. In this article, we will understand what a soft and a hard inquiry is and how it affects your credit score.

What is a hard inquiry?

When you apply for a credit product like a loan or credit card, the financial institution (bank or NBFC) has to access your credit report and score. It is known as a hard inquiry. The credit score is one of the important inputs based on which the financial institution decides whether to approve or reject your credit application. Your credit profile helps the financial institution evaluate your creditworthiness, based on which they further decide whether to approve your credit application. A hard inquiry is also known as a hard pull or a hard credit score check.

Impact of hard inquiry on credit score

Financial institutions take the individual’s consent before doing a hard inquiry on their credit profile. Every time a hard inquiry is done, it impacts the individual’s credit score negatively. The more the number of hard inquiries on a credit profile at the same time or in a short time span, the higher the negative impact on the credit score. Hence, it is recommended that you should not make multiple credit applications at the same time.

If you have applied for a personal loan with a bank, wait for the bank’s final decision before making another loan application with another bank. Have you made multiple personal loan applications with various financial institutions simultaneously or in a short time span? The bank will interpret it as credit hungry behaviour from your side. In such a scenario, it can reject your personal loan application.

The same thing can happen when you apply for credit cards. Hence, it is recommended that you apply for one credit card with one bank at a time and wait for the bank’s final decision before making the next application.

What is a soft inquiry?

Any other inquiry on a credit profile, apart from the hard inquiry, is a soft inquiry. Some examples of soft inquiries include the following.

1. An individual accessing their own credit profile.
2. A financial institution accessing your credit profile to evaluate whether you qualify for a pre-approved offer. Banks and NBFCs do soft inquiries regularly and, if eligible, send personal loan or credit card pre-approved offers to individuals.
3. Your existing financial lender is accessing your credit profile to evaluate whether you are still creditworthy.

When a bank or others do a soft inquiry, they get an overview of your credit profile without revealing the details that show up in a hard inquiry. An employer can also do a soft inquiry for an employee’s credit background check. A landlord can demand a soft inquiry on the tenant’s credit profile to decide whether to give the apartment on rent. A soft inquiry is also known as a soft pull or a soft credit score check.

Impact of soft inquiry on credit score

A soft inquiry doesn’t impact an individual’s credit score. Hence, you can access your credit profile as many times as you wish without worrying about its hit on your credit score. Infact, you must check your credit profile regularly, maybe once every 3-6 months. Your credit profile gives you a snapshot of existing and closed loans and credit cards issued in your name.

While checking the credit report, you can identify if there are any errors in the personal information, wrong/missing entries, loans/credit card(s) issued in your name that you are not aware of, etc. If your credit score is low, your credit report can give you some insights into the reasons for it. Accordingly, you can take corrective action to improve your credit score.

Inquiry information in credit report

Your credit report shows the details of the various inquiries made by banks and NBFCs on your credit profile. You will find these details at the end of the credit report under the “Enquiry Details” section. The details include the name of the bank/NBFC that has done the inquiry, the inquiry date, the inquiry purpose (loan/credit card), etc.

For every credit application you make, there will be a hard inquiry, and your credit score will drop by a few points. But you don’t need to worry about it. If you display good credit behaviour for the next few months, the credit score will recover.

Managing inquiries

Now that you understand the difference between hard and soft inquiries, make sure you manage them well. Accessing your own credit report being a soft inquiry, will not impact your credit score. Hence, check your credit report regularly for errors/frauds, if any. Checking the credit report will also help you manage your credit score well and keep a tab on bank credit inquiries. If you spot a hard inquiry for a loan/credit card you have not applied for, take it up with the bank that has done the inquiry.

While making any credit application, make sure you make one application at a time and wait for the bank’s final decision. Every credit application you make will result in a hard inquiry. Too many hard inquiries simultaneously or in a short time span can damage your credit score. Banks will send you offers for credit cards on a first-year-free (FYF) or lifetime-free (LTF) basis. However, it is important to evaluate whether you really need that credit card, and only then apply for it. It will ensure you give consent for hard inquiry only for credit products you need.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.