Every time you apply for a loan or credit card, the lender asks for a credit check. Although some loans require only a soft credit check, most of them require a hard inquiry in order for the application to be approved. Each hard inquiry stays on your credit report for up to two years. However, you should be aware that even such a credit check does not affect your rating for more than a year. Moreover, often requests cease to have an impact on the loan after a few months.
However, you should be aware that a few hard credit checks in a short period of time can worsen your credit significantly. Learn more about what is the difference between hard and soft credit checks and how long a request can affect credit.
What is the difference between a hard and soft inquiry?
When reviewing your credit reports, you will most often see hard inquiries, but you will also encounter soft credit checks. It is important to understand the difference between the two in order to understand how soft and hard credit checks affect your credit score.
If you check your credit yourself, this is a soft credit check and is not reflected in your credit report. Also, if you have applied for a loan, in order to obtain financing, the lender will also request a soft credit check. The company or your employer can also check your credit, but your permission is required. Thus, soft credit checks do not affect your credit score and do not remain on your credit report.
However, if you are pre-approved and want to get a loan, then the lender will ask for a hard credit check to assess your financial situation and decide if you will be able to make regular monthly payments. A hard credit check, as opposed to a soft one, can worsen your credit and stays there for 2 years. However, you should know that such a check no longer affects your credit after a year.
How much a hard inquiry can lower your credit score?
More and more people are wondering how much their credit would deteriorate with a hard credit check. According to the FICO, a hard credit check can lower your credit score by up to 5 points. However, you should understand that the credit will recover in a few months and a hard credit will no longer affect the credit after a year.
However, you should understand that a large number of hard credit checks in a short period of time can significantly worsen your credit and they will affect your credit score for a longer time. Therefore, it is not worth applying for several types of loans at the same time. But remember that hard checks remain in your credit for 2 years, after which they disappear.
What other factors can negatively affect my credit?
It is, of course, important to note that a large number of hard inquiries is not the only factor that negatively affects your credit rating. Explore what factors are still taken into account:
- Payment history. Payment history is perhaps the main factor affecting your credit history. If you make timely regular payments, then it will have a positive effect on your credit. However, if you are more than 30 days late in payments, your credit will deteriorate. Moreover, the longer you do not make a payment, the worse for your credit.
- Amounts owed. Also, you should pay attention to the credit utilization ratio. Here's a simple example: if your credit card limit is $ 1000 and you only use $ 400, then your credit utilization ratio is 40%. However, it is advisable that your limit does not exceed 30% or even less.
- Length of credit history. Please note that a long credit history has a positive effect on your credit score. Thus, if you have recently opened several new accounts, then the total length of the credit history has decreased and your credit score may also have decreased.
- Credit mix. For this factor to be normal, you must use a large number of loan types, for example, student loan, mortgage, credit card, and more.
- New credit. As mentioned, when you apply for a new loan, it also worsens your credit history. Moreover, if you applied for a loan to several lenders at once, then this can significantly worsen your credit.
What types of loans do not require a hard credit check?
Many people are looking for loans with no hard credit checks or no credit checks at all. Such loans exist, however they have their own risks.
- For example, if you apply for a Payday Loan (cash advance), then more often than not, the lender will not request a credit check at all. Such loans are simple and short-term and also do not have a lot of requirements. However, Payday Loans have extremely high interest rates which can be very difficult to repay.
- Another option is the Title Loan. This type of loan is secured, so some title lenders do not ask for a credit check. However, if you cannot repay such a loan on time, then the lender will be able to sell your collateral (in this case, a car) in order to consolidate the debt on the loan.
So, as you can see, loans with no credit check are not the most profitable solution to your problems. A hard request will cease to affect your credit after a few months, however, you will receive a better loan offer and interest rates.