Credit Inquiries: Soft vs. Hard

Written by Posted On Monday, 10 August 2020 05:00

There’s lots of information about you listed inside your credit report. Of course, most of the information pertains to your credit history. In fact, nearly two-thirds of your credit score is made up of payment history along with comparing current account balances with credit lines. For consumers who want to improve or repair their credit, concentrating on these two categories alone will do the most good. One other category also contributes to the overall score referred to as “credit inquires.” While credit inquiries don’t directly affect the score, it does so if a new credit account is opened. An occasional request for new credit won’t harm a credit score but repeated ones can and will. 

Credit inquiries fall into two categories, sometimes referred to as a “soft” and a “hard” inquiry. A hard inquiry is one where the consumer makes a direct request for new credit. That request can be for a car loan or a credit card. Each time someone applies for a car loan, the lender looks up the credit history of the potential borrower while at the same time listing the inquiry on the report. The inquiry will show who made the hard request and the date. Again, an occasional request is okay and helps someone establish or repair a credit report due to the appearance of a new account. Used properly with timely payments, the initial inquiry ultimately helps a credit score. 

However, multiple inquiries over a limited of time will give a lender some pause. If you think about it, what would a lender think if over the past few years, the consumer used credit responsibly with a car loan, a credit card and a student loan. Suddenly however, say over the course of the last 90 days, multiple hard inquiries hit the credit report. While no new credit lines are issued, a lender would want to know what’s going on. Why all the requests? Is someone suddenly out of work or soon will be? Loss of income? When inquiries pop up, lenders will often ask for an Explanation Letter. This is an official term used in the mortgage business but in essence it’s a letter written by the borrower providing an explanation about some facet of their credit history. With a hard inquiry, the lender will want more information.

When you consider that most businesses who issue credit report credit activity once every 30 days. With a credit inquiry, if a new account was indeed established, it won’t appear as an active credit line until the reporting period has arrived. The lender doesn’t know if the credit inquiry for New Car means someone was just testing the waters and didn’t buy the car after all or if a new loan was taken out and the monthly payments were $600 per month. 

A soft inquiry on the other hand, is when a company researches credit histories to see if an individual meets their credit profile. If so, an offer to apply for a credit card or car loan might come in the mail or an inbox. The consumer is not aware of this inquiry because the consumer didn’t initiate the request. A soft inquiry can also come from other types of business who use credit to make a business decision. Automobile insurance comes to mind. Soft inquiries don’t affect credit scores. Hard ones do.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

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