When a lender performs a credit inquiry, they check your credit report to help determine your creditworthiness. These reports typically come from one or more of the three major credit bureaus Equifax®, TransUnion® and Experian®.
A loan officer has the option of performing a hard or soft inquiry on your credit report before offering you credit. They each have different requirements and impacts on your score, so it’s important to understand the difference before you start rate shopping. Below we explain everything you need to know before reaching out to a lender.
What is a Credit Inquiry?
A credit inquiry is when someone submits a request to one of the credit bureaus and receives your credit information. Typically, a credit inquiry is made when you’ve filled out an application to apply for things like a mortgage, car loan or credit card. If the company or service that’s asking for your credit information has the right to receive the information for review, the credit bureaus provide them with your credit report.
Federal law gives you the right to know when someone makes an inquiry about your credit information. You can find these reports of credit inquiries in your credit file. By law, all three bureaus are required to report each inquiry to your file.
Two Types of Credit Inquiries:
There are two types of credit checks a lender may perform when you apply for a loan. One is a hard credit check, and the other is called a soft credit check. Knowing the difference and how they impact your credit score is important. Here’s a breakdown:
Hard Credit Check:
Typically, lenders will do a hard credit check when you fill out an application for a loan or line of credit. These credit inquiries allow a borrower to get a complete picture of your spending habits and your financial history before they agree to lend money.
When companies do a hard inquiry, it will be noted in your credit file and might lower your credit score by several points. The average hard credit check can lower your score by up to 10 points. If several hard inquiries appear on your credit report when you’re shopping for a loan it could affect your ability to be approved.
You often see a hard credit check done on your credit when you file an application for one of the following loans or services:
- Loan Applications (i.e. home, auto, student, personal, etc.)
- Applications to rent an apartment/condo/home/etc.
- Applications to open a new utility line
- Applications for a new credit card
- Requests for credit limit increases
- Collection agency skip tracings
Soft Credit Checks:
If you’re rate shopping for a loan or line of credit, your best choice is to have a lender do a soft credit inquiry with a software solution such as FPN’s PreQual. You can avoid a lengthy application process and the inquiry won’t show up on your credit report. Lenders still receive the credit information they need to quickly prequalify you for a loan.
Not all lenders offer loan prequalification, so it’s important to ask for a soft credit inquiry whenever you’re trying to find the best loan rates. Here are a few examples of the best times to request a soft credit inquiry.
- Personal credit checks
- Pre-approvals for credit card offers
- Pre-approval for insurance quotes
- Mortgage pre-approvals
- Insurance applications
- Account reviews by current creditors
- Applications for employment
Hard inquiries and soft inquiries both serve their purpose in the lending process. But it’s always a good idea to go with a soft credit check first. It will save you time and avoid lowering your credit score. So, the next time you’re shopping for a loan be sure to ask your lender if you can get prequalified for a loan before filling out a lengthy application.