Few people know the difference between a hard credit check and a soft credit check. However, there’s one key difference you should know: hard credit checks generally occur during applications by lenders; soft checks are usually not used for financial situations.
Aside from their purpose, hard and soft credit checks share several different traits and uses, depending on who requests the check. So, keep reading to explore the ins and outs of the credit check world!
3 Major Differences Between Soft and Hard Credit Checks
- Credit Score Impact
Hard Credit Checks
Most people believe any credit check can impact their credit score, but only hard credit checks impact your score. When you undergo an application requiring a hard credit inquiry, you’ll see the inquiry on your credit report not long after.
A hard inquiry sticks around on a credit report for up to two years. Depending on why the inquiry occurred or how many other credit checks have hit your score recently, your credit score can take a minor hit, usually no more than five points per check.
Conversely, a soft credit inquiry does not appear on your credit check or impact your credit score. However, there may be times when a soft inquiry is later followed up by a hard credit check before a lender approves any funds or credit issuance.
Hard Credit Checks
Hard credit checks serve a different purpose than soft credit checks in most cases.
Hard credit checks usually occur for:
- Mortgage applications. Home mortgage applications use credit checks to help determine the amount of loan, interest rate, and discounts an applicant qualifies for.
- Auto loan applications. Auto loans require a hard credit check to authorize an amount of credit to pay for the vehicle.
- Student loan applications. Student loan applications by private lenders to determine how much a student can receive and if they need a cosigner on loan.
- Personal loan applications. Hard credit checks help lending institutions determine how much a person can pay back on a personal loan.
- Credit card applications. Most credit cards require a hard credit check to determine the size of credit and any specific card offers an applicant qualifies for.
- Requests for credit limit increases. If an individual requests an increase in credit limit on an existing line, the lender may require a hard credit check to ensure the applicant qualifies.
- Utility applications. Utilities are used before payment, similar to credit lines. Companies expect reimbursement at the end of every month. As such, most utility providers require credit applications for homeowners.
- Internet service applications. Like electricity and water services, internet providers give customers internet access on a prorated basis. You pay them back each month for the service. Thus, they require a credit check.
- Apartment rentals. Landlords like to know they’ll get paid rent on time. As a result, hard inquiries occur to verify your payment history and check for any defaults that may point to a risky tenant.
Why Hard Credit Checks Matter:
Hard credit checks protect the lender from irresponsible applicants. FICO estimates that consumers with five or more credit checks in a year are six times more likely to become delinquent on credit obligations.
In short, hard inquiries generally occur for financial situations. Lenders, landlords, and service providers want to know that they can trust you to pay your rent, bills, and loans on time.
Soft Credit Checks
Soft credit checks serve a more diverse purpose than hard credit checks. In some cases, they do get used to help creditors make financial decisions, but they also occur for other life events.
Soft credit checks usually occur for:
- Employment applications. Some employers want to know if an applicant is financially irresponsible, leading to fraud or theft. Some companies require CEO or finance job applicants to undergo credit checks for similar reasons.
In some cases, employers want to know how reliable and organized you are and use credit history to check those traits. In addition, soft credit checks can help the employer determine if you can stick to an agreement.
- Insurance applications. Studies show that individuals with higher credit scores are less likely to file insurance claims. Therefore, insurance companies like to get a picture of the possibility of future claims.
- Personal credit checks. You can check your credit or receive credit updates from lending institutions periodically without impacting your credit score.
- Pre-approval offers from creditors. Some lenders, including Simple Fast Loans, offer pre-approved lines of credit to customers after a soft credit check. However, they usually require a hard inquiry to occur before issuing any credit.
- Creditor account reviews. Credits can periodically check their customers’ accounts with soft checks to review any discrepancies, updates, or progress without impacting a credit score.
Why Soft Credit Checks Matter:
In short, soft credit checks provide various institutions extra background on an applicant without damaging their credit. In addition, they help protect the institution from unreliable applicants.
3. Initiation Process
How a hard credit check initiates differ from soft credit checks. Hard credit checks require authorization of the applicant to begin; not all soft credit checks do. Additionally, hard credit checks occur only after you apply for something, not before.
Who Uses Soft Credit Checks?
Many institutions utilize soft credit checks, including the following:
- Credit Unions.
- Auto insurance providers.
- Home insurance providers.
- Mortgage lenders (for pre-qualifying offers).
Who Uses Hard Credit Checks?
Most institutions that utilize hard credit checks do so for financial reasons. So, you’ll generally see these types of institutions using hard credit checks:
- Credit unions.
- Private lenders.
- Credit card companies.
- Mortgage lenders.
- Electricity or water companies.
- City utility departments.
- Internet service providers.
- Cell phone service providers.
The Pros and Cons of Soft Credit Checks
There are several benefits to soft credit checks that help contribute to their popularity of use, including:
- Soft credit checks don’t impact applicant credit scores.
- Soft credit checks give lenders, employers, and insurance companies a snapshot of credit history.
- Applicants can see soft credit check history for up to 24 months on their credit report, but lenders cannot see them at all.
However, there are some downsides to soft credit checks:
- Soft credit checks do not guarantee credit issuance to potential applicants.
- Soft credit checks do not appear on reports for lenders, meaning lenders won’t know if someone is considering taking out multiple lines of credit from various lenders.
The Pros and Cons of Hard Credit Checks
Hard credit checks come with many pros and cons for applicants and lenders alike. Some pros include the following:
- Hard credit checks allow lenders to protect themselves and other lenders by tracking applications on credit reports.
- A successful hard credit check can authorize credit for applicants.
- In some cases, multiple hard credit checks in a short time frame (for a mortgage or student loans, for example) can count as a single credit check.
The downsides of hard credit checks occur for lenders and applicants alike:
- Applicants can see their credit score drop several points.
- Lenders can only use hard credit checks for a specific credit application.
- Hard credit checks stay on credit reports for up to two years.
- Multiple hard credit checks over a year can severely damage a person’s credit score.
How Does Simple Fast Loans Use Credit Checks?
At Simple Fast Loans, we use both hard and soft credit checks in our lending process. Our customers occasionally receive pre-approved offers for lines of credit generated after a soft credit inquiry. However, in most cases, we use hard credit checks during our loan process.
Simple Fast Loans offer installment loans and credit lines for our customers. During the application process for either of these products, we will run a hard credit check. Therefore, you can expect the process to go something like this:
- First, you decide to apply for a loan.
- You gather the important verification documents, including a government issue ID, social security number, phone number, income information, and banking information. We will take great care to protect your personal information.
- Simple Fast Loans offers our installment loans and lines of credit entirely online. You apply online at SimpleFastLoans.com in as quickly as ten minutes.
Note that your application will have information regarding the use of your credit report. We will only run a credit check if you finish your application and have authorized the credit check.
- We receive your application within minutes of your submission. After receipt, we run a hard credit check using your provided social security number and personal information.
Your credit score and payment information may help determine the amount of money, interest rate, or future special offers based on your application.
- You receive your application status usually within ten minutes. If approved, we will send the loan funds to your bank account on file. If declined, you can reach out to us at Simple Fast Loans to discuss options.
Final Notes On Credit Checks
When it comes to credit checks, just remember that a hard credit check applies to a specific application for credit, and does impact your credit score, while soft credit checks serve a more general purpose and don’t hit your credit score.
Understanding the different types of credit checks can be a daunting challenge. The good news is, the team at Simple Fast Loans can help you navigate the questions in the credit check process. So don’t be afraid to reach out during your application process. We are here to help!