It is common practice for a person’s credit report to be pulled by creditors or lenders when someone wants to secure a loan for a home or automobile or open a credit card account. Thanks to the Fair Credit Reporting Act, there are laws designed to protect consumers when it comes to their credit information being collected.  As a result, when someone’s credit file is viewed, it is considered either a hard or soft credit inquiry.

Due to the adherence of certain procedures by all parties who request to view a consumer’s credit report, consumers know that their credit will need to be pulled from time to time, but what’s the difference between hard and soft credit inquiries?

Hard Credit Inquiries

A hard credit inquiry, also known as a hard pull, is a request made by a creditor or lender to review someone’s credit profile when they are seeking credit.

For example, when applying for a personal loan or credit card, the applicant grants the lender permission to view their credit report. Credit reports include information about the consumer’s ability to manage debt and credit by providing details about things like the number of credit accounts they own, the type of credit accounts they own, and the amount of debt a person may have. Lenders like to review each applicant’s credit report and the information reflected on the report to determine if an application should be approved or denied.

Since the applicant is seeking to open a new credit account, it will appear as a hard inquiry on their credit report even if the application is denied. Once a hard inquiry appears on a credit report, it will remain for two years. Each of these inquiries that are listed will provide details as to when someone applied for credit and how often. This information is factored into a person’s credit score, so it can be harmful to have too many hard inquiries listed.  In fact, hard inquiries can result in a decrease in credit score.

Soft Credit Inquiries

A soft credit inquiry, also known as a soft pull, is a request made by an individual, company, or financial institution to review someone’s credit profile when they are not seeking credit.

For example, when a consumer decides to view their own credit report to confirm that the information listed is accurate and up to date, or when an employer is performing a background check on a potential employee and needs to verify their identity. The consumer is not submitting an application for credit, so this is considered a soft inquiry. Unlike a hard credit inquiry, this type of inquiry does not show up on credit reports. Although, the consumer will be able to view each of these instances, whether their credit report was viewed by the consumer, potential employer, or another individual, lender, or company that needed additional information about the consumer.

In some cases, someone who is interested in securing a personal loan may decide to check rates or pre-qualify for a loan before submitting an application. Although the lender is using the applicant’s credit information to provide potential rates for the personal loan, it is considered a soft inquiry because there was not an actual application for credit submitted.

It may not always be disclosed whether a credit inquiry will be soft or hard. Depending on the reason for the inquiry, consumers may be able to determine the type of inquiry, but it is not a bad idea to ask. With hard inquiries impacting credit scores in a negative way, and soft inquiries having no impact, consumers want to be cautious of how many hard inquiries they have listed.

 

 

Not having a credit score and having a bad credit score are some of the worst financial positions you can find yourself in. Both situations can prevent a landlord from renting you an apartment or may dissuade a creditor from approving you for a loan. Simply put, both situations negatively affect your creditworthiness. To get a clearer picture of each issue, here is the difference between no credit and bad credit.

Having No Credit

Having no credit means there isn’t any information to judge your repayment abilities. Such information is supposed to be reflected in a credit report. Hence no credit translates to not borrowing money in the last 7 years- the time it takes for a credit report item to be removed.

Having Bad Credit

Bad credit means that on a scale of 350-850 points, your score is near the 350 point mark. This happens when you mismanage your credit by being late or missing monthly payments and defaulting.

The Differences

Fees That You Will Be Charged

When you don’t have a credit score you will get charged deposit fees when opening an initial account with creditors. On the other hand, with bad credit, you may not be charged deposit fees. However, when opening one, you will be scrutinized through a bank-specific version of a credit check.

Electricity, phone, cable, and other utility companies also investigate your credit during the application process. A bad credit history attracts a security deposit in order to establish service in your name. Without a credit score, you may not incur such fees.

Chances of Getting a Loan

Each creditor is different, some will allow you to get a loan without the need of any credit history while others will refuse. For young people –just out of college, you might be approved credit on the condition that you have a stable job. On the other hand, with bad credit, you may qualify for a loan but with strict unfavorable terms, like high-interest rates.

It is easier to get a cosigner when you have no credit than when you have bad credit. For any person looking to be your cosigner, they will look at how you repay your debt. This is because if you default or skip payments, their score takes a dip too. Another disadvantage of bad credit is that you may qualify for a lower amount and higher rates than a person with no credit score.

Ease of Building Your Score

With no credit, building your credit score is easier compared to fixing bad credit. Bad credit means that you are working from a bad debt management and repayment situation with different lenders. However, when you have no credit, you are working from a level ground where past financial mistakes don’t influence your score.

Bad credit can be good if there were mistakes when it was being calculated since it can be fixed, which will see your credit take an upward bump.

Career Goals Influence

Having no credit is better than having bad credit when it comes to influencing your career path. Prospective employers check credit scores. They are likely to accept a young prospective employee who has no credit than a person with bad credit.

Impact over Time

The impact of bad credit changes over time and terms become favorable with good debt management. Similarly, bad credit could continue lowering your score if left unchecked.

If you miss payments or default, this information remains on your credit report for a whole 7 years from the date that the incident was marked. This will surely affect some of your financial actions during this time.

The impact of no credit doesn’t change over time. Without a score, there is no damaging financial information to worry about. However, your options when it comes to credit will be very limited.

Conclusion

The above information highlights the main differences between a lack of credit and having bad credit. It also goes further to explain how each scenario affects your finances plus how to deal with each situation.