On Saturday night, I was out at a bar with some friends when an incredibly cool bar discussion topic came up. We started talking about credit scores and credit reporting. (Now you know my friends are as cool as I am.)
Even friends who understand credit were having trouble with one topic, and it is very important for your credit score. I clarified with them on Saturday, and I will clarify with all of you today.
Hard Hit
A hard hit takes place when your bank, credit issuer, future employer, or other company pulls your full credit report for a review. If you apply for a new loan, the bank will most likely want to review your full credit history in their underwriting process. That results in a hard hit on your credit score.
Every hard hit will be visible on your credit report. If you go apply for a car loan at five different banks over a few months if you keep getting rejected (a bad idea), five hard hits will be visible on your credit report. Simply put, the people who run hard hits on your report will see all previous hard hits for the last two years. Hard hits do not happen on their own. You have to explicitly give permission for a bank to run a hard hit on your credit report.
A hard hit does impact your credit score. It is not a major factor in your score compared to payment history and credit balance used, but it does have an impact. If you have more than two hard hits per year, or a whole lot of recent hits, it is a signal that you are out there trying to get big credit lines. That lowers your score and desirability to lenders.
One thing to note, however, is that if you do a couple of loan application for the same thing in a couple of days, like two car loan applications or two mortgage applications right at the same time, they may be bundled together and only considered as one hit, but that doesn't always happen.
Soft Hit
If you are pre-approved for a credit card or insurance policy, that company ran a soft hit on your credit. A soft hit gives a limited view of your credit history. Companies do not need your permission to run a soft hit.
The nice thing about a soft hit: you are the only one who can see them.
Because you have no little control over soft hits, lenders do not get access to see who is checking you out. Banks that you have a credit card with most likely run a soft hit on your report monthly, quarterly, semi-annually, or annually to ensure your credit score has not had a dramatic change.
You can limit soft hits to your credit report. Visit OptOutPrescreen to get your name off of the lists. It is free from the credit reporting agencies. You should not pay for this type of service. If you are in the market for a new credit card, these offers are nice to receive. If you are concerned with your identity more than offers, I suggest opting out. (I have opted out)
A Soft Hit vs. a Hard Hit on Credit
A hard hit shows up on your credit report and can hurt your score. A soft hit is invisible to lenders and has no impact on your score.
Any questions? Leave them in the comments below.
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thanks for that. always wondered where to opt out.
No problem. It only takes a few minutes.
Thanks. Never knew it was possible to opt out. Just did it for both of my addresses 🙂
Glad I could help Jonny.
I was under the impression that any number of auto inquiries will count as one hard pull during a specified period of time to allow and even encourage loan shopping. (I've heard both 14 and/or 30 day periods, so I am not sure as to length.)
This was also true on mortgage loans. Has this changed?
While each credit card application is considered one inquiry, generally, home and auto loans are treated differently. It is common for a consumer to shop around for the best rates, and that requires applying for auto and home loans with different lenders. Each lender may ask for their own copy of the consumer’s credit report. Although the consumer has applied multiple times for credit with these lenders, the credit reporting agency may consider the requests as one hard hit within a 14-day period.