In the US, checking an individual’s credit history is necessary for various reasons. Whether it’s for a job application, a business loan, or car loan approval, it is important to check one’s credit history.
Having an excellent credit history means one also has a good credit score. Taking care and maintaining excellent financial health can give lenders insight about how responsible and trustworthy you are when it comes to finances. A healthy credit score is favorable for you in terms of getting approvals from banks and other lending institutions. As for businesses, every time you process a loan application, a credit inquiry is commonly required. This credit check has two types: soft inquiry and hard inquiry.
We are going to discuss credit check’s purposes and their possible impacts to your credit score and loan applications.
Credit score checks and credit inquiries
Credit score checks and inquiries are the primary assessment of one’s financial behavior. As the name implies, credit score checks occur when a bank or financial institution looks into your credit history, especially previous loan applications and credit score.
You should expect that they may do so with your consent, since this is part of the process for loan approval. These inquiries are mandated by the FCRA or the Fair Credit Reporting Act, which requires financial institutions to keep your reports.
Soft credit inquiries
Soft credit inquiries, also known as soft pulls, are requests of background checks on a company or to the owner itself. Soft pulls are commonly practiced for personal reviews, pre-approvals, credit card offers, and sometimes applicant reviews requested by an employer.
Soft pulls do not incur any deductions to your credit score since they are not associated with a financial application or loan. Overall, soft credit inquiries are a great way to use as an assessment for possible loan opportunities, pre-approvals, and as a way to review and update your knowledge about your financial health.
If you are shopping for a future loan, it may be best to do a soft credit check to update yourself about your new status. This could also be a great way to check for bills and debts that you can fix and dispute before applying for a loan. If lenders spot the bad transactions before you do, it will significantly affect your loan approval.
The same idea applies to business. Since most businesses have their credit lines, getting a soft pull creates an accurate report for all of your credit transactions, plus a well-detailed story if you’re planning to set up a loan. This inquiry also allows you to fix any issues on your card, such as missed payments or to see your current standing when choosing the correct loan application.
Hard credit inquiries
Hard pulls are background checks that financial institutions request to inspect your financial history. This process happens when one is applying for a loan, such as but not limited to, business loans, auto loans, and personal loans.
Be careful with these inquiries as hard pulls could shave off a few points in your credit score since it checks your eligibility for loan approval. Deductions may not have much effect when an applicant has an outstanding credit score. However, borrowers with borderline statuses may compromise their credit score standing, especially those looking for online bad credit loan lenders. They are more than likely to request a hard pull on your report than a soft pull.
For businesses, hard pulls are considered a more accurate way of measuring your credit-worthiness. Since hard pulls occur during the final steps of the application, this would generally affect your credit score. Be mindful of this process as lenders become more cautious when opening deals with you if you have multiple hard pulls on your record in a short period.
Managing your credit inquiries
Ensuring the safety of your credit score is essential for every credit check, so you need to differentiate between hard and soft pulls. One thing you should do is to ask beforehand if they require a hard pull before processing the requested loan.
There are also things you can do to manage your credit inquiries properly.
- Apply for credit loans only when needed and urgent.
- Avoid numerous hard inquiry checks as they hinder your next loan application.
- Check and research about lenders before applying for loans.
- Regularly check your credit reports and review that all hard pulls made are within your knowledge and formal consent.
Another issue that needs to be addressed are instances of fraud and hard pulls without your consent. When this happens, you can consult the CFPB or the Consumer Financial Protection Bureau to file disputes and reinstate the deducted scores.
Preparation and obtaining essential reports make up for high chances of loan approval. Soft inquiries must be regularly made since they don’t affect your credit score. On the other hand, hard pulls will deduct your score. Hence, before settling for a loan, prepare adequate soft pulls, and pay your bills and debts on time. Also, cooperate with your bank or other financial institutions for hard pull disputes and resolve suspicious entries to your credit history.