Your Credit Score: 'Soft' vs. 'Hard' Inquiry

There are two types of inquiries on a credit report: a "soft inquiry" and a “hard inquiry”. There’s a big difference between the two - with a potentially significant influence your credit score.

• Hard inquiries are usually triggered when you apply for a loan or for credit. But hard inquiries can also be made for non-credit reasons, like opening a checking account at a bank. Hard inquiries, individually, don’t have much impact on your credit score, although they do stay on your credit record for two years. But if you have enough hard queries, the damage to your credit can mount up. A silver lining: if a hard inquiry leads to a negative ding to your credit rating, the inquiry only impacts your credit score for one year. After that, the inquiry does not count against your score.

• Soft inquiries are typically non-credit related and usually have little or no impact on your credit score. In fact, lenders typically don’t even see a soft inquiry, and credit score models don’t factor soft inquiries into calculating your score. What’s a typical soft inquiry? There are several common inquiries, including ordering your own credit report, or an employer that checks your credit report before offering you a job (employers are increasingly vigilant about using credit scores as a barometer of financial “character” – they want employees who are upstanding citizens who pay their bills and don’t have liens or bankruptcies in their financial past). Soft inquiries are also used by credit card carriers to send you pre-approved credit cards (card companies can buy your contact information from the major credit scoring agencies).

By and large, soft inquiries don’t have nearly the potential impact that hard inquiries have on your credit score. But if you’re uncomfortable with the idea of having so many soft inquiries on your credit report, you can opt out of credit agency mailing lists by visiting www.optoutprescreen.com.

To reduce the number of hard inquiries, there are a few simple, but effective steps you can take.

First, don’t get suckered in by those ubiquitous “15% off by signing up for a store credit card today”. No amount of new running shoes or bath towels are worth the negative impact to your credit score by signing up for a new store credit card. Credit agencies usually take a dim view when you open up a new credit account. The natural assumption is that you’ll use the new credit card to rack up debt, and deplete your income in paying that debt off.

Also avoid those “no money down for the next six months” deals. Such accounts are considered to be “new credit” deals by scoring agencies, and can stay on your credit report for a long time. And if you don’t pay the debt off quickly, the interest rate can rise dramatically and can stay on your report for as long as it takes to catch up and pay off the debt.

In the end, a soft inquiry won’t hurt your credit score, while a hard inquiry has the potential to drag your score down; increasingly so as the number of hard inquiries add up. But you have control over the number of hard inquiries generated, use that control to keep hard queries down, and your credit score up.

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