What is the difference between hard and soft inquiries on your credit report? (2024)

For instance, Bangalore-based IT professional 32-year-old Ajay Sharma accessed his credit report in February in run up to his plan to apply for a car loan in March.

The inquiry that was conceived last month was soft, whereas the inquiry generated by the bank where he applied for loan is ‘hard’. Let us understand this in more detail.

Impact of both kinds of inquiries:

Hard Inquiries: Hard inquiries take place when a lender checks your credit report as part of the process of making a lending decision. These inquiries usually happen when you apply for a loan or a credit card.

These are recorded on your credit report and could have a temporary negative impact on your credit score. Each hard inquiry often results in a small fall in your score, usually a few points. It is vital to remember that too many hard inquiries — within a short period — when accompanied by a high number of new accounts, may indicate to banks that you are actively seeking credit. This could indicate financial stress and increase perceived risk.

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These inquiries remain on your credit report for a couple of years, but as one would expect their impact on credit score falls over a period of time.

Soft Inquiries: Soft inquiries take place when credit report is accessed for a slew of reasons but different from a bank’s review of creditworthiness. Some of the common examples of soft inquiries entail checking credit report, pre-approved offers for credit cards or loans, background checks by potential employers and account reviews by existing lenders.

Notably, soft inquiries do not affect your credit score and are not even visible to the banks which review your credit report for taking decisions related to lending.

These inquiries are often used for informational purposes and therefore, do not affect your creditworthiness.

So, it is vital to understand the difference between hard and soft inquiries since this can help you manage your credit wisely. While hard inquiries are important when applying for credit, it’s generally advisable to keep the number of hard inquiries as few as possible in order to prevent any negative impact on your credit score.

On the other hand, soft inquiries can be made freely without affecting your credit score or creditworthiness.

Frequently Asked Questions:

Why should you check your credit report?

Monitoring your credit score regularly helps you stay informed about your financial standing and any changes that may impact your ability to borrow money or access financial products.

How often should you check your credit score?

Most experts recommend to check the credit score at least once a year.

Can there be mistakes in credit reports?

It is not uncommon to spot mistakes on credit reports. So, regularly checking your credit score allows you to spot any errors, such as inaccuracies in personal information or incorrect reporting of accounts or payments.

Does applying for new loan impact the credit score?

Each time you apply for credit, it triggers a hard inquiry that can temporarily lower your credit score. So, it is advisable to limit new credit applications, particularly if you’re planning to take out a significant loan soon.

Is this important to diversify your credit mix?

It is advisable to have a mix of different types of credit accounts, such as credit cards, loans, and collaterals, which can positively impact your credit score.

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Published: 20 Mar 2024, 01:42 PM IST