Are you worried that any time a lender reviews your credit report your credit score will dip or take a hit? Fortunatelly, this isn’t how credit reporting works! This is why it’s helpful to understand the difference between hard and soft credit inquiries.

You often hear both terms used when researching on considering lending options for working capital, but how does each type of credit inquiry impact your credit score? While a hard credit inquiry (when you apply for a new credit product) does impact your score, a soft inquiry (when a lender or other third party reviews your score for a purpose other than applying for credit) won’t affect your credit score at all.

If you’re trying to increase your credit score, chances are you are tracking many factors, such as paying your bills on time and the amount of available credit you are using, also referred to as credit utilization. Both of these factors combine for 65% of your credit score. But did you know that credit inquiries make up 10 percent of your credit score and some types of credit inquiries can lower your credit score?

Let’s dive deeper into how hard inquiries and soft inquiries work, as well as how they can affect your credit score.

What Is a Credit Score?

Credit scores are created by credit rating companies, like VantageScore® and FICO®. They're based on information in your reports from the three major bureaus - Experian®, Equifax® , TransUnion ™. Your credit score is based on your credit history and can play a significant role in the type of loan and loan terms, such as interest rate, a lender may offer you. Although score ranges vary depending on the credit scoring model, generally a FICO® score of 580 to 669 is considered fair; 670 to 739 is considered a good credit score; 740 to 799 is considered very good; and 800+ is considered excellent. The higher your number, the better you look to lenders because it signals that you’re more likely to repay your debt on time.

A credit score is usually calculated taking into account the following

• 35%, payment history
• 30%, credit utilization 
• 15%, length of credit history
• 10%, credit mix 
• 10% new credit

Where does my credit score come from?

Have you ever wondered why credit scores from different lenders may not match? That’s because each credit reporting agency differs slightly in the scoring models, but one thing that consumers may not know is that most credit scores in the United States are created by VantageScore® or FICO®. VantageScore® is a 2006 consumer-credit scoring system that created by Equifax, Experian, and TransUnion as an alternative to the FICO® score developed in the 1980s Despite the three agencies contending that VantageScore uses machine learning to create more precise data on creditworthiness, the FICO® score is still the most used credit score used by approximately 90% of lending agencies.

What is a credit inquiry?

A credit inquiry is exactly what it sounds like—an inquiry into your credit. When you apply for a credit card, begin shopping for a loan or prepare to take on a new financial responsibility, like renting a warehouse for inventory or upgrading your commercial kitchen equipment, the lenders and companies involved want to know whether you’re likely to be a financial risk. By running an inquiry into your credit history, these companies are able to assess your level of financial responsibility and the likelihood that you might default on your loan, make a late payment, or have miss payments altogether.

There are two different types of credit inquiries: hard inquiries, which can have a negative effect on your credit score, and soft inquiries, which don’t affect your score at all.

What is a hard inquiry?

A hard inquiry (also referred to as a hard credit check or hard pull) occurs when you apply for a new credit product, such as a loan or credit card. When you apply for a loan, lenders pull your credit report from at least one of the major three major credit reporting agencies and review your report in order to determine the risk of lending money to you. Hard pulls on your credit report signal that you are looking to open a line of credit. The more inquiries you have in a short period of time, the more creditors might assume you are in distress or have financial needs and therefore at a higher risk for delinquencies. Despite the need to give permission for a company to perform a hard pull on your credit, a hard inquiry will generally lower your credit score by a few points.

Common hard credit inquiries include:

• Credit card applications
• Loan applications (including mortgages, car loans, and personal loans)
• Apartment rental applications
• Phone or utility applications (such as turning on electric in a house or signing up for a new cellphone contract)

These checks are tied to an application and will therefore show up on your credit report. 

What is a soft inquiry?

A soft inquiry, on the other hand, will not appear on your credit report and does not affect your score at all. Generally speaking, a soft pull does not include your full credit profile and score. Instead, the lender may get an estimated score based on the information requested or may get limited information pertaining to just one area of your report.

These credit checks are usually not indicative of a firm financial commitment, are not tied directly to a credit application of any kind, and therefore are not recorded on your report and do not affect your credit score.

There are two different types of soft inquiries: 

• Requests from yourself when you want to review your own credit
• Requests from an outside party, which may include employment background checks, insurance quotes, pre-qualifications for loan products, credit limit increases  

While opening new credit accounts involves a hard pull, looking at pre-qualified offers generally only requires a soft pull. Card issuers or other lenders may offer to perform one to give you insight into your approval odds before you submit an official application. Although some soft credit inquiries (such as employer credit checks) only take place with your permission, other soft inquiries don’t require permission and may even occur without your knowledge.

How to improve your credit score

When information is updated on a borrower’s credit report, their credit scoring changes and can rise or fall based on new information. Here are some ways a consumer can improve their credit score altogether:

• Pay your bills on time: Six months of on-time payments is required to see a noticeable difference in your credit score. 
• Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you maintain a lower credit utilization rate.
• Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Keeping existing credit accounts open, despite not using them, helps maintain a lower credit utilization which is preferable. 
• Work with a credit monitoring or repair company: If you don't have the time to improve your credit scoring, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee. Given the benefits of a good credit score, it could be worthwhile to spend the time researching a credit repair company that is reputable and has a reasonable fee. 

Where can I check my credit score for free?

According to the Consumer Financial Protection Bureau, consumers are entitled to a free credit report every 12 months from each of the three major credit reporting agencies. You can request your copy by visiting AnnualCreditReport.org, calling (877) 322-8228, or mailing a request form (download the request form here).

The bottom line

Your multiple credit scores and overall credit report are both important to your financial health. Knowing the difference between a hard pull and a soft pull can help you mitigate the risk of dinging your score and give you peace of mind that checking your different scores or going through a pre-qualification tool won’t affect it.

That’s why understanding how your credit reporting works is paramount when looking for small business funding, whether it is through traditional lending institutions or alternative financing avenues.  

At Fundomate we’re on your side. Getting access to new working capital (up to $350,000 for well-qualified applicants) has never been easier. You don’t have to worry about hard pulls on your credit or your credit scores dipping below a certain threshold that you’ve worked so hard to achieve. Prequalify in a few minutes, and get funded within 24 hours, with no impact on your credit score by visiting fundomate.com.

We take an outside the box approach when evaluating your funding application by looking at your recent business transactions so we can precisely determine your eligibility and provide you with instant and relevant offers.

Plus, there is no restriction on what you can use the money for, although we recommend putting the funds towards income generating activities. Our customers usually use the funds for: purchasing inventory, payroll financing, equipment financing, marketing expenses or business expansion capital.

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