27 September, 2024 | 17:36 IST
Lenders and financial services providers often carry out an assessment of the creditworthiness of their borrowers using their credit scores. It’s important to understand how an inquiry by a lender would affect your credit score. The assessment of your credit score by any financial services provider could be a ‘hard inquiry’ or a ‘soft inquiry’.
A hard credit inquiry refers to verification of your credit score by a lender for a credit instrument like a personal loan or credit card. Also known as a ‘hard pull,’ this process involves lenders recording their review in your credit reports to evaluate your credit history, including your payment behaviour, any negative marks and the amount of credit you currently avail. To prepare for a hard credit pull, it’s wise to monitor your credit reports for any surprises, which you can do yourself through a soft credit inquiry, or ‘soft pull.’ Importantly, while a hard credit inquiry can impact your credit scores, a soft credit inquiry won’t affect your score.
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A credit inquiry occurs when a lender checks your credit report to evaluate your creditworthiness. These inquiries are essential in determining whether you qualify for various credit products and services. You can also check your credit score online anytime and this won’t affect your score. Moneycontrol lets users access a free credit score and detailed credit report on its app and website. This tool is intended to assist you in efficiently managing your credit score and navigating the difficulties of credit inquiries.
Credit inquiries are generally classified into two categories: Hard Inquiries and Soft Inquiries.
What is a hard inquiry?
A hard inquiry, also known as a hard pull, happens when a lender or creditor examines your credit report as part of their decision-making process. This usually occurs when you apply for new credit, such as a loan or a credit card. Hard inquiries help the lender assess if there’s any risk associated with lending to you.
Hard inquiry credit score impact: One of the key considerations regarding a hard inquiry is its impact on your credit score. A hard inquiry can result in a brief dip in your credit score. This decrease is generally small, often ranging from 5 to 10 points, but it could be higher if you have multiple hard inquiries within a short period.
For example, if you apply for several credit cards or loans within a few months, each application results in a hard inquiry, which can cumulatively affect your credit score significantly. However, this effect is usually short-term, and your score should recover once the inquiries age and you continue to manage your credit responsibly.
What is soft inquiry?
A soft inquiry, or soft pull, occurs when a credit report is checked for general purposes other than lending. This includes situations where you check your own credit score, or when a company reviews your credit report for pre-approval offers or background checks.
Soft inquiry credit score impact: A soft inquiry does not affect your credit score. Whether you check your own credit report regularly, or a company performs a soft inquiry for marketing purposes, these inquiries are purely informational and do not affect your creditworthiness. For example, you can safely check your credit score on the Moneycontrol app without worrying about the activity impacting your credit score.
To know the differences between hard inquiry and soft inquiry, here’s a list of some common scenarios:
Hard inquiry examples
Soft inquiry examples
Understanding the difference between hard inquiries and soft inquiries is important for managing your credit score effectively. Hard inquiries can impact your credit score and affect your ability to secure new credit, so being strategic with credit applications can help minimise their impact. On the other hand, soft inquiries provide valuable insights into your credit status without negatively affecting your score.
ALSO READ: What Affects Your Credit Score & How To Build a Healthy Credit Score
A hard inquiry or a soft inquiry impacts your credit score and overall credit worthiness. A higher credit score can help you secure better terms on loans and credit cards, while a lower score may result in higher interest rates or less favourable terms. Understanding the credit score impact of inquiries by lenders can help you make informed decisions about managing and improving your credit.
In conclusion, by understanding the difference between hard inquiries and soft inquiries you can manage your credit health with confidence. While hard inquiries can temporarily affect your credit score, soft inquiries have no impact. By using a tool like the Moneycontrol app to monitor your credit score and report, you can make informed decisions about applying for new credit and managing your overall financial health.
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