Financing Fundamentals

The difference between hard and soft credit checks — and why it matters

Vincent Ninh

April 29, 2022
7
min read

You probably know this already, but lenders will usually check your credit history before issuing you a loan. Whether it’s for a car loan, mortgage or some other type of financing, a lender wants to assess the likelihood of you paying them back before taking on the risk of lending you money. 

What you may not know is that not all credit checks are born equal. Certain credit inquiries, usually those that directly affect a lending decision, are considered “hard” and impact the prospective borrower’s credit score. On the other hand, some inquiries are considered “soft,” and do not affect credit scores. The latter have traditionally have been used for informational purposes (like conducting a background check) but some lenders have started using them for approving loans as well.

Let’s dive a little deeper into the two types of credit inquiries, how they can impact you and your credit score, and which one Wisetack uses when offering loan terms (spoiler alert: it’s the “good” kind).

What exactly is a credit inquiry?

Mechanically, soft and hard inquiries (also referred to as “checks” or “pulls”) work the same way. A company — often a financial institution — that wants to know about your creditworthiness will reach out to a credit bureau and ask them about your credit history

Your credit history, in summary, keeps track of your debts and how you’ve managed to pay them. It documents three key factors:

  • How many credit accounts you have (opened and closed)
  • The balances on open accounts
  • Your repayment history

This information is what primarily constitutes your credit report, which is shared with the entity conducting the inquiry. A credit score, which is the only thing many lenders look at, is a number calculated by credit bureaus using a scoring model (either FICO® or VantageScore®) that assesses your creditworthiness based on the factors mentioned above.

Although the process of pulling hard and soft credit inquiries is the same, their effect on credit scores is not. Let’s learn more about both types to figure out why.

Hard credit inquiries

A hard credit inquiry often occurs when a lender uses the results of this inquiry directly as part of their loan approval process. A mortgage loan application is a good example of that. With this type of check, the lender also legally needs your consent before proceeding. 

Because it means you are considering taking on a new debt, a hard credit check will most likely lower your credit score — by how much exactly depends on your credit history and the timing of the pulls. Too many pulls for different types of loans in a short period of time can damage your credit score and make lenders see you as high-risk. (An exception is usually made if you’re shopping around for the same type of loan, like a mortgage or car loan, within a certain window.)  

FICO scores, which are most commonly used by lenders, usually go down five points or less for most people following a hard pull. These scores take into account checks from the last twelve months.

However, hard credit inquiries tend to have a greater impact on those with few accounts and/or a short credit history. They also stay on your credit report for two years. Although they are unavoidable (and worthwhile) at times, it is generally in your best interest to minimize them. 

Soft credit inquiries

On the other hand, soft credit checks have traditionally been used for many reasons unrelated to lending you money. Common causes include: an employer conducting a background check, receiving an insurance quote, and checking your own credit score. 

However, more and more lenders today are using soft pulls as part of their decisioning process. This is a good thing for customers: soft inquiries, as the name might suggest, are easier on your credit score since they usually do not indicate commitment to a new debt. In fact, they don’t affect it at all.

Soft pulls are often completed without your explicit consent, and even without your knowledge sometimes. (We don’t believe that's right and make sure our customers are aware of any credit checks we are running.)

What type of credit inquiry does Wisetack conduct? 

Unlike many lenders, Wisetack only runs a single soft credit check for both the application and approval process. This means customers can see and review options, choose preferred terms, and finalize the loan without having to worry about credit impact. 

Repairs, services and projects can be expensive, especially if unexpected, and we believe nobody should have to worry about how they’re going to afford to fix their water heater or take their puppy to the vet. 

Furthermore, we pride ourselves on transparency and fair terms, providing true 0% APR loans for eligible customers. Once we pre-approve you for a loan, we also disclose upfront the monthly payment, term, interest rate and total interest for your options. Note that once a loan is issued, we do report loan performance to the credit bureaus — but this is a great opportunity for you to build a better score by making on-time payments.

Our human-first approach is yet another reason why our customers love us: our average NPS (Net Promoter Score) is at a sky-high 78. (For reference, the average NPS in the financial services industry is somewhere around 56 or 44, depending on who you ask.) 

Want to learn more about us? See what we’re all about here or contact us here

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