Did you know that a company can get your credit information with just your name, address, date of birth, and consent? A common misconception is that a social security number is needed.
Credit checks are an uncomfortable fact of adulthood. Everything from buying a home or car, renting an apartment, taking out a personal loan, applying to certain jobs and even having utilities turned on, can involve a credit check. Yet one of the confusing aspects of having good credit is that even as credit checks are becoming more common, having too many can lower your credit score.
Not all credit checks are equal in terms of their impact. There are two different types of credit checks: a “soft” inquiry and a “hard” inquiry. Below is a more in-depth look at each type of inquiry.
What is a Soft Credit Inquiry?
Soft inquiries often take place during an employment background check or when you check your own credit. Soft inquiries don’t negatively impact credit scores no matter how often they take place and they can even occur without the individual knowing about them.
Consumers are sometimes surprised to learn that organizations are able to obtain information from a soft credit inquiry even if the consumer has not given explicit consent. Also, soft credit inquiries don’t require the consumer to provide a social security number.
Soft inquiries are often used by companies that send out pre-approved offers by mail, for example. Soft credit inquiries will often show up on your credit report, but as noted, they don’t affect your credit score.
You can review your own credit reports and scores without worrying that it will hurt your credit. In fact, Federal Law guarantees the right to access their credit reports from each of the three major credit bureaus annually for free. For a small fee, these reports will also provide a credit score. Additionally, many credit card companies and banks have started to offer customers access to their credit scores for free.
Related: Figure out how much interest you could be expected to pay on your debt with our Credit Card Interest Calculator.
You can usually see soft credit inquiries on your own credit report. You might see language like “inquiries that do not affect your credit rating” with the name of the requester and the date of the inquiry.
It’s important to regularly (at least once a year) review your own credit to make sure you’re on track and that there aren’t errors in the credit report. Errors can be disputed by writing directly to the credit reporting agency, whose report shows inaccurate information. Additional information about how to dispute errors can be found on the Federal Trade Commission’s website.
What is a Hard Credit Inquiry?
A hard credit inquiry typically takes place when applying for a credit card, mortgage or car loan.
All hard inquiries will show up in your credit report, and factor into credit score calculations. Having too many hard inquiries can lower a credit score. It tells future lenders that a consumer is repeatedly trying to apply for new credit, potentially indicating that they might be having financial issues and are relying heavily on credit and loan accounts.
Importantly, hard inquiries stay on a consumer’s credit report for two years, after which point, they are no longer factored into the credit score calculation.
How to Avoid Hard Credit Inquiries
The number of hard credit inquiries on a credit report is one component that makes up a credit score calculation. Other factors include the length of credit history, payment history, open credit utilization, number of derogatory remarks, and total number of accounts.
While having a few credit and loan accounts is expected and can even boost a credit score, consumers should carefully consider if they need new credit before applying for an additional loan or account. Consumers shouldn’t, for example, apply for a department store credit card simply because they want to receive a discount on their purchase.
Another way to reduce the number of hard inquiries is to ask which type of credit check a company will run before agreeing to the inquiry. You may want to ask if there’s a way to avoid the credit check. An example would be a cable company that requires a hard credit inquiry prior to opening a new account. The account holder might be able to avoid the credit inquiry by paying a deposit or submitting a letter of credit from their previous cable company.
In short, credit checks are becoming more common and it may be difficult to reach your financial goals without the help of loans and credit. You should be proactive about achieving a good credit score and reducing the number of hard inquiries reflected on your credit report. A strong score not only makes it easier to qualify for credit or a loan but can also help you get the lowest interest rates.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a credit repair organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.