Whenever you finance something—a car, a home, furniture, appliances, another major expense—the odds are pretty high that you’ll have to agree to undergo a credit inquiry, also known as a “credit check.” But what exactly does that mean, and do credit checks affect your credit score? Here’s what to know about your credit score, your credit report, and the differences between “hard” and “soft” credit inquiries.
You might hear “credit score” and “credit report” used interchangeably. But be aware: While they are closely intertwined, they are not the same thing.
Your credit report is a detailed list of your financial interactions, whether you’ve been paying your bills on time, how much debt you carry (such as credit card debt, student loans, auto loans, and mortgages), and whether you’ve ever foreclosed on a home or declared bankruptcy. Your credit report also contains some personal information that can help prove your identity, such as your name, address, and Social Security number. Your credit report cannot contain information about your gender, race, national origin, marital status, and other private information.
Your credit score is a three-digit number between 300 and 850, with 850 being the highest and 300 being the lowest possible scores. Credit scores are determined by taking into account all the information provided by your credit report, and there are several different scoring models that different companies use. Each one has a “secret formula” that determines how heavily certain information is weighted. One of the most popular scoring models is the FICO® score, which uses a five-category scoring model that weighs payment history (35%) amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Read more about what makes up your credit score.
The short answer: Yes. The simple act of getting a credit check could potentially lower your score a few points. Losing those few points may not sound like a big problem, but when you’re working hard to improve your credit score, every point matters. And nobody wants to see their hard work undone over something as small as a credit card application.
Read more about how to boost your credit score.
Fortunately, there is a way that creditors can minimize the number of credit checks potential borrowers must submit to: the soft credit check. Creditors insist on checking your credit before issuing loans (it’s nothing personal). They simply want to assess the risk involved in lending money to you. And because a credit check—or “credit inquiry”—may affect your credit score, smart borrowers know to minimize the frequency at which that happens. One way in which lenders can help lessen the potential damage to borrowers’ credit scores is to offer a “soft credit check.”
A soft credit check involves a lender—or a borrower on behalf of themselves—checking a credit report to get a general assessment of how creditworthy the borrower has been and will likely be going forward. Lenders complete soft credit checks to determine how likely you are to get approved for a loan, or to determine if your credit might need some work before they’ll lend to you. If everything looks good, you can get prequalified with a mortgage lender.
Getting prequalified doesn’t guarantee that your loan will be funded, but it does indicate that your credit is favorable and that you have a decent chance of getting approved for a loan. After that, you can proceed to a hard credit check that will officially determine if you’re eligible.
By utilizing soft credit checks, lenders can tell potential borrowers if they’re likely to be approved for credit before they complete a hard credit pull that could ding a credit score. Another upside is that borrowers can do soft credit checks on themselves, and regularly checking your own credit report can help you stay on top of your financial health.
There are many free services that allow you to check your credit whenever you want. Many of these services will even alert you if something suspicious happens on your credit report so that you can take action when necessary. If you’re trying to improve your credit (and unless you have a perfect credit score, we believe there’s always room for improvement!), a soft credit check could be your new best friend.
Read more about the benefits of a healthy credit score.