'Hard' vs. 'soft' credit pulls
How your credit record is pulled will affect your credit score
Dear Opening Credits,
Your statement about soft pulls was ambiguous. Is a soft pull an inquiry that will show on a credit report even if it doesn't affect the overall score? Thanks. -- Phillip
Ambiguity in the personal finance and credit world is definitely not good, so I'm glad you spoke up. When I refer to "pulls," I'm talking about credit report inquiries. There are two basic types of them -- hard and soft -- and anyone who is interested in creating a good credit rating and getting a loan with excellent terms needs to know the difference.
Therefore, to clarify...
A soft pull sounds like something you'd do while making taffy, doesn't it? Well, in the realm of credit, it is when a company or individual -- yourself included -- accesses your consumer credit report for promotional or informational purposes. When it's accessed, it has no impact on your credit score at all.
So who would make a soft pull inquiry, and why? You, for one. It's important to look at your credit report at least once a year, both to check for accuracy and just to see how you're doing. (You're entitled to at least one free credit report through each of the three big credit credit reporting agencies through the website AnnualCreditReport.com.) When you access it, you're not applying for a loan or line of credit. You're just reviewing your file to make sure all is as it should be. That's an example of a soft pull.
Banks and other financial institutions conduct soft pulls when scouting out potential new borrowers. They want to see the credit reports for people who meet the specific criteria for one of their products. When they have that, they send promotional letters to the matches. Therefore, if you get a letter in the mail inviting you to apply for a line of credit, it's because of what the issuer saw on your report. Same goes for a lender who is prequalifying you for a mortgage. You haven't actually gone though the formal loan application process -- they're just giving you a preliminary positive nod.
Employers and landlords may also pull your report softly. They aren't considering lending you any money; they just want to know how you've managed your financial affairs. In general, they would like to see that your payment pattern is good and that you aren't overextended.
As you might have gathered by now, a hard pull is when you -- Joe or Jane Consumer -- actively applies for a loan or line of credit. When you complete the paperwork and send it in, the financial institution will then take a serious analytical look at your credit report to determine acceptance. Hence, a hard pull.
This type of inquiry will remain listed on your report for two years, and it will affect your FICO score. Don't worry too much, though, as it will only be calculated into your score for a total of 12 months. Inquiries comprise just 10 percent of a FICO score -- a relatively minor factor when compared to your payment history, the amount of debt you carry and the length of time you've had and used credit.
Additionally, if you're looking for a loan and are concerned that multiple hard pulls are going to hurt your ability to get the best that's available, you can relax. As a consumer, you're expected to shop around. So these hard pulls don't negatively impact you while you're looking, they aren't included in your FICO for 30 days from the first application. Still, it pays to be prudent and to only pursue the credit you really need and want.
And that's pretty much it, Phillip. I hope I've made the distinction between hard and soft pulls crystal clear!
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Published: December 22, 2010
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