Understanding Credit: Soft vs Hard Inquiries

Applying for a new credit card, financing a car, renting an apartment or buying a home often comes with a credit check. But did you know there are two different types of credit inquiries and they don't affect your credit the same way?

Understanding the difference between hard and soft inquiries can help you make more informed financial decisions and feel more confident when applying for credit.

Why Does Your Credit Score Matter?

Your credit score is one factor lenders may consider when evaluating a credit application. It can help provide insight into your history of managing borrowed money.

Lenders may use your credit information to help determine:

• Whether you qualify for a loan or credit account

• What interest rate you may receive

• How much you may be able to borrow

• What terms may be available to you

Even a small difference in your interest rate can add up over the life of a large loan such as a mortgage. That's why maintaining healthy credit can be an important part of preparing for major financial goals.

Understanding Your Credit

Here are a few common credit terms that will be helpful as we dive in.

Your credit history is a record of your past borrowing and repayment behavior. It can include information such as how long your credit accounts have been open, your payment history, outstanding balances and delinquent or charged-off accounts.

Your credit report is a detailed report of your credit history prepared by a credit reporting agency. Financial institutions may use information from your credit report when evaluating your creditworthiness.

Your credit score is a number used to measure creditworthiness. Credit scores are calculated using information in your credit report and may be considered when you apply for a credit card, loan or other financial service.

When you submit a credit application, also known as a loan application, you provide information about your creditworthiness. This may include information about your residence, employment, income and existing debt.

Together, these pieces of information can help lenders understand your financial history and make informed decisions about credit.

What Is a Credit Inquiry?

A credit inquiry occurs when you or an appropriate party accesses information from your credit report. There are two main types: hard inquiries and soft inquiries.

Soft Inquiries: No Impact on Your Credit Score

Soft inquiries are generally used when someone reviews your credit for informational purposes rather than as part of a new credit application.

For example, a soft inquiry may occur when:

• You check your own credit report using the SavvyMoney feature on your Heritage Digital Banking app 

• A credit card company reviews your credit to make a pre-approved offer

• An existing lender reviews your account

• A potential employer conducts a credit-related background check where permitted and with the appropriate authorization

Soft inquiries do not affect your credit score. That means you can check your own credit without worrying about lowering your score.

Regularly reviewing your credit report is a smart financial habit. It gives you an opportunity to make sure your information is accurate and identify anything that may need your attention.

Hard Inquiries: What Happens When You Apply for Credit?

A hard inquiry typically occurs when you apply for new credit and authorize a lender or creditor to review your credit as part of the application process.

Hard inquiries can occur when applying for:

• A mortgage

• An auto loan

• A credit card

• A personal loan

• Other forms of new credit

Unlike soft inquiries, hard inquiries can have a small, temporary effect on your credit score. The impact can vary depending on your individual credit history and the credit scoring model being used.

One hard inquiry usually isn't something to worry about. However, applying for several new credit accounts within a short period may raise concerns for potential lenders because it can indicate that you are seeking to take on multiple new credit obligations.

How Long Do Hard Inquiries Stay on Your Credit Report?

A hard inquiry can remain on your credit report for up to two years, although its impact on your credit score is generally much shorter.

That means a hard inquiry isn't something that should prevent you from applying for credit when you genuinely need it. Instead, focus on being intentional about when you apply and avoid unnecessary applications for multiple new accounts.

Have Questions About Your Credit?

Understanding your credit can sometimes feel overwhelming, especially when you're preparing for a major financial decision. You don't have to navigate it alone.

If you have questions about your credit, are preparing to apply for a loan or simply want to better understand your options, talk with the team at Heritage Federal Credit Union. We're here to help you understand the lending process, answer your questions and help you feel more confident about your financial goals.

Whether you're buying your first car, preparing to purchase a home or working toward improving your credit, we're happy to talk through your questions and help you understand what steps may make sense for you.

Have a credit question or concern? Reach out to us today.

Insured by NCUA. Membership restrictions apply. Subject to credit approval.All funds will be verified.

The views and opinions expressed in this blog are those of the writers, and do not necessarily reflect the views or positions of Heritage Federal Credit Union.

Resources

For additional information about credit terms and financial education, visit the National Credit Union Administration's MyCreditUnion.gov resource center and its credit glossary. MyCreditUnion.gov Credit Glossary