Whenever we wish to apply for any financial product, whether it’s a loan or credit card, lenders often check our creditworthiness. This is done by checking your past financial records and based on that your application is processed. Credit enquiries play a crucial role in determining your credit score and can influence your ability to secure loans, credit cards or other financial products.
Every time credit checks are done, it may or may not affect your credit score. These checks you can divide between hard and soft enquiries. Understanding the difference between soft and hard credit enquiries can help you manage your credit profile more effectively. In this article we will try to decode and simplify the difference between the two enquiries and make it easy for you to understand this process.
What is a Soft Credit Enquiry?
A soft credit enquiry, also known as a soft pull, occurs when you or a third party checks your credit report for informational purposes. It does not impact your credit score and is typically conducted without your explicit permission. Soft enquiries are often used in the following situations:
1. Self-Check: When you check your own credit report to monitor your credit health or detect errors. Also, you request financial institutions to check your credit score to know your eligibility.
2. Pre-Approval Offers: When financial institutions, like banks or credit card companies, pre-approve you for credit products based on a preliminary assessment of your creditworthiness.
Since soft enquiries are not linked to a credit application, they do not indicate that you are actively seeking credit. Therefore, they have no impact on your credit score. It is advisable to regularly review your own credit report to stay informed about your credit health and to identify any discrepancies or signs of identity theft.
Also Read: NPS Calculator: Already in your 40s? How much should you save to get Rs 5 lakh monthly pension?
What is a Hard Credit Enquiry?
A hard credit enquiry takes place when a lender or financial institution checks your credit report as part of a loan or credit card application process. This enquiry is directly related to your request for credit and requires your authorisation. Common scenarios for hard enquiries include:
1. Loan Applications: When you apply for personal loans, home loans, auto loans or education loans.
2. Credit Card Applications: When you apply for new credit cards or request a credit limit increase.
3. Home Loans: When you seek home loans or loan refinancing options.
Multiple hard enquiries can have a negative impact on your credit score because they suggest that you are actively seeking credit, which can be perceived as an increased risk by lenders. Hard enquiry may remain on your credit report for up to two years. However, multiple hard enquiries for the same type of loan within a short period (such as shopping for a mortgage or auto loan) are often treated as a single enquiry, reducing their impact on your score.
Key Differences Between Soft and Hard Enquiries
| Soft Inquiry | Hard Inquiry |
| Credit score will not be affected | Credit score will be affected |
| Can be done without consent | Consent is required |
| Done for pre-approved loans or to check credit score | Done when you apply for a loan or credit card |
| May not be displayed on the credit report | Will be displayed on the credit report |
| May remain on the credit report for up to two years | May remain on the credit report for up to two years |
How to Minimise the Impact of Hard Enquiries
1. Limit Credit Applications: It is good to avoid applying for multiple credit cards or loans in a short period. Each application results in a hard enquiry, which can lower your credit score.
2. Plan Major Purchases: If you plan to apply for a significant loan, like a home or auto loan, avoid applying for other forms of credit around the same time. This will minimise the impact of hard enquiries on your score.
3. Pre-Approval Checks: Try to use pre-approval checks that involve soft enquiries before applying for credit. This allows you to assess your eligibility without affecting your score.
4. Check Your Credit Report: Regularly reviewing your credit report helps you understand the number of hard enquiries made and allows you to dispute any unauthorised ones.
Knowing the difference between soft and hard credit enquiries is crucial for anyone looking to maintain a healthy credit score. While soft enquiries are harmless and useful for keeping track of your credit health, hard enquiries can have a temporary negative impact on your score. Since your credit score is very important, it is a good idea to perform these checks to avoid any negative impact on your financial health.
(The author is CEO of Bankbazaar.com)
Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.