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Dec 24 2020

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Check personal credit score

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Hard vs. Soft Credit Checks & Their Affect on Credit Scores

A hard credit check negatively impacts your credit score compared to a soft credit check, which has no impact. Hard credit checks typically occur when you apply for a loan or credit card. A soft credit check occurs when your credit report is pulled for a background check, like when you check your credit score.

If you’d like to check your credit for free before we get started, you can get a free score with Nav without impacting your credit score. Nav also provides you with a free summary of your business credit.

Hard vs. Soft Credit Check: How They Are Different

There are a handful of differences when comparing a soft vs. hard credit check. These differences typically vary, but the most important difference is hard credit checks can decrease your credit score by one to give points whereas soft credit checks don’t.

The major features of a hard credit check are:

  • Hard credit checks typically occur when you apply for a loan or credit card
  • Hard credit checks bring up your entire credit history
  • Each hard credit check can decrease your credit score by one to five points
  • Hard credit checks stay on your credit report and are visible to lenders for up to two years

The major features of a soft credit check are:

  • Creditors perform soft pulls to verify or send you pre-approval offers
  • A soft credit check doesn’t give creditors your entire credit history
  • A soft credit check does not affect your credit score and is not visible to creditors
  • Soft credit checks are never visible to other creditors

It’s important to note that credit inquiries don’t affect your business credit report or business credit score. With that in mind, we discuss personal credit inquiries and how they relate to your personal credit report and personal credit score.

How a Hard Credit Check Works

Hard credit checks are typically used for loan and credit card applications to gauge a potential borrower’s creditworthiness. The credit check pulls your full credit report and creditors evaluate your personal credit score. If you see an unauthorized hard credit check, you can dispute it and ask for it to be removed.

To understand more, FitSmallBusiness interviewed Adam Beaty, a certified financial planner at Bullogic Wealth Management, and he said:

“There are two types of credit checks, hard and soft inquiries. A hard inquiry is when a lender is checking your credit before making a lending decision. This is common when applying for a mortgage, new credit card, or automobile loan.”

Sometimes, other consumer-initiated transactions, such as signing up for a new cell phone contract, can also trigger a hard credit check. The key with a hard credit check is that you need to take some kind of action, such as applying for credit, to trigger a hard credit check.

How a Soft Credit Check Works

A soft credit check normally occurs when a person, organization, lender, or creditor checks your credit as part of a background check or pre-approval process. Unlike hard credit checks, soft credit checks don’t require you to provide written permission. However, a soft credit check gives only a high-level credit summary, and it doesn’t affect your personal credit score.

When you check your own credit score or give permission to someone like a potential employer to review your credit report, a soft credit check occurs. Soft credit checks may also occur when businesses, such as credit card companies, check your credit to pre-approve you for offers. Remember, these don’t impact your credit score, and you shouldn’t worry about having too many soft credit checks.

Soft vs. Hard Credit Check: How They Affect Your Credit Score

Before agreeing to a credit check, it’s important to know how they affect your credit score. A hard credit check requires approval because it dings your credit score up to five points, with the exception of rate shopping. Soft credit checks, however, don’t impact your score and therefore don’t need approval.

The credit score ranges you need to know when considering soft and hard credit checks are:

Summary of Personal Credit Score Ranges

How Hard Credit Checks Affect Your Credit Score

Generally, every hard credit pull dings your credit score by one to five points. It’s important to know these credit score ranges, especially if you’re on the borderline of a good credit score. A hard inquiry might drop you down into a fair or poor personal credit score range.

Five points may not seem like a lot, but one too many inquiries can make a lender wonder if you’re a good credit risk. If you have a borderline credit rating, even a five-point deduction can hurt your ability to qualify for loans or favorable loan terms.

We sat down with Brock Blake, CEO of Lendio who said:

“Hard pulls only occur when you apply for credit, when one of your existing creditors decides to pull it, and they can do so at any time without your permission. This is common when reviewing your account for a credit line increase. It will have a slight negative effect on your overall score, and records of these inquiries will remain with you for two years, but only negatively affects your credit for one year.”

A good rule of thumb with a hard inquiry is that you can have up to two inquiries on your report at once with no major effect. Once you exceed two inquiries in a two-year period, your credit score might begin to drop significantly, and it might raise red flags with potential creditors and lenders.

How Soft Credit Checks Affect Your Credit Score

A soft credit check doesn’t affect your personal credit score. In fact, soft inquiries appear only on credit reports that you yourself request and aren’t visible to other entities that check your credit.

You can use services like Nav to stay up to date with your personal credit score. A good rule of thumb is to pull your credit report once per quarter.

When You Can Expect Hard & Soft Credit Inquiries

It’s important to know when you can expect hard and soft credit inquiries, especially because some may hurt your credit score. You can expect a hard credit inquiry anytime you are taking on a new monthly payment. You should expect soft inquiries when you check your credit yourself or are pre-approved for a credit offer.

When You Can Expect Hard Credit Inquiries

Generally, whenever you’re taking on a new financial commitment, you can expect a hard credit inquiry. For example, applying for a credit card or loan, getting a new cell phone contract, or requesting a line of credit increase. Creditors typically want to know your credit history when you’re bringing on a new monthly payment.

Four examples of when to expect a hard credit inquiry are:

  1. When applying for a credit card.
  2. When applying for a loan like personal, mortgage, car, business, and so on.
  3. Getting a cell phone contract.
  4. Requesting a line of credit increase.

You should always be aware of when you can expect a hard inquiry on your credit report because they require permission. If you didn’t apply for new credit and you receive a hard inquiry, this should be a red flag. It’s important to dispute any errors immediately with the reporting credit agency.

When You Can Expect Soft Credit Inquiries

A soft credit inquiry, on the other hand, can be done without your permission because they don’t impact your credit score. You can expect a soft credit inquiry for pre-approval processes when you check your own credit score, background checks, and getting an insurance policy.

Four examples of when to expect a soft credit inquiry are:

  1. Loan and credit card pre-approval letters.
  2. Checking your own credit score.
  3. Employer background checks and other background checks.
  4. Getting an insurance policy like life, renters, car, homeowners, and so on.

When Lenders Can Pull Your Credit

There’s a fine line between when lenders can pull hard and soft credit checks. Some lenders may address if they plan on pulling a hard inquiry in the fine print of a loan application or contract. However, in most cases, the Fair Credit Reporting Act (FCRA) allows a soft credit inquiry without any approval.

When Lenders Can Pull a Hard Credit Check

A hard credit check typically occurs when you apply for a loan, credit card, or mortgage. In most circumstances where a hard pull is required, an entity has “permissible purpose” under the FCRA to check your credit. For example, a bank has a permissible purpose to check your credit before allowing you to open an account.

If you initiate a transaction and a creditor has a permissible purpose, they do not need explicit consent to do a hard credit pull. Instead, the initiation of your application or transaction is considered to be consent.

This is why it’s common practice for creditors to notify you in the fine print of a loan application or a contract that they plan to check your credit. If you don’t want your credit pulled, hold off from signing the document and providing personal information like your Social Security number and date of birth.

When Lenders Can Pull a Soft Credit Check

When it comes to a soft credit check, the FCRA allows creditors to do a soft pull without you even knowing about it, except for background checks, when written permission is required. Creditors most often do soft pulls so that they can send you pre-approval offers in the mail, which you can opt out of.

By requesting a free copy of your credit report, you can view every inquiry that’s been performed on your credit, both soft and hard. If you see a fraudulent hard inquiry on your report, you can dispute it. If you do file a dispute, credit reporting agencies have 30 to 45 days to investigate and respond.

There are two ways you can avoid a hard or soft credit inquiry. First, you can opt out of a hard credit check by not signing a document that says you give the lender approval. Second, you can opt out of a soft credit check by calling 1-888-5-OPT-OUT or visiting OptOutPrescreen.com. By following these steps, you can reduce possible hard inquiries and save your personal credit score in the long run.

How Rate Shopping Affects Your Credit Score

Rate shopping typically requires a hard credit check. However, this hard credit check acts like a soft credit check because of the special rules set by FICO and VantageScore, the two main credit scoring models. By grouping the inquiries within a 30- to- 45-day window, they generally act as one inquiry.

A few key things to remember when rate shopping are:

  • Home mortgage (30 to 45 days): FICO groups together all hard credit checks from home mortgage companies in a 30-day window and treats them as a single inquiry; any additional hard credit checks run in the next 45 days are treated as a single additional check
  • Car loans (30 to 45 days): FICO also groups together hard credit checks from car loan companies in a 30-day window and only counts them as a single inquiry; any additional hard credit checks run in the next 45 days are treated as a single additional check
  • Student loans (30 to 45 days): Finally, FICO also groups together all hard credit checks for student loans in a 30-day window and treats them as a single inquiry; any additional hard credit checks run in the next 45 days are treated as a single additional check

VantageScore, on the other hand, lumps together all inquiries made during a 14-day window together as one for scoring purposes. These special rules mean that it’s OK to shop around for certain types of loans without worrying about it hurting your credit score. However, different lenders use different scoring models, so it’s difficult to predict which rate shopping rules will apply when.

Hard vs. Soft Credit Check Example

A hard credit check is generally what we need to worry about most when having our credit report pulled. If you can strategically have them done in a period of time, they can have little to no impact on your credit score similar to a soft credit check.

Hard Credit Check Example

If you are rate shopping for a home mortgage, several hard credit checks may be required. You can reduce the number of inquiries on your credit report by having them done in a 30-day window. If you can do this, FICO only counts them as one inquiry. This can help reduce the negative impact they have on your personal credit score.

Soft Credit Check Example

In contrast, if you are applying to rent an apartment, it’s typical that a landlord may require a soft credit check. This gives them a summary of your credit history to ensure you can afford to make the rent payments. Unlike a hard credit check, you don’t need to have these done in a window of time since they have no impact on your credit score.

How to Check Your Credit Score

To check your credit score, you can receive free personal credit scores online through websites like Credit Karma. They provide you with your credit score that only count as a soft credit check. Unfortunately, businesses aren’t entitled to a free credit score report and must explore other options.

You can use an online credit platform like Nav that helps business owners manage their business credit with instant access to both business and personal credit reports. Nav offers both free personal and business credit scores and full business credit reports starting at $24.99 per month.

Frequently Asked Questions (FAQs) About Hard & Soft Credit Checks

We covered a lot of information on hard and soft credit checks. There are some questions which are asked more often than others, and we address those here. If you have any other unanswered questions, please feel free to share them in the comments below or on our FitSmallBusiness forum, and we’ll provide an answer.

Here are some of the most frequently asked questions about hard and soft credit checks:

Can I Remove Hard Inquiries My Credit Report?

Hard inquiries generally stay on your credit report for two years. However, you can dispute any errors. To dispute hard inquiries, send a letter to the credit bureau that generated the report and explain what the error is. If you do file a dispute, credit reporting agencies have 30 to 45 days to investigate and respond.

Who Can Pull My Business Credit Report?

As long as you have established business credit, anyone with your business’s name and address can pull your business credit. However, there are no penalties for this like there is with your personal credit score. There’s no need to worry because your business credit report won’t reflect any of your sensitive personal credit information.

How Do Credit Inquiries Affect Your Business Credit?

Anyone can pull your business credit report, as long as they have your business’s name and address. Since it’s easier to check a business’s credit, you won’t be penalized for inquiries on your business credit report. In contrast, your personal credit score can fall between one to five points from a hard credit inquiry.

What Is a Soft Credit Check?

A soft credit check is when a company or person runs your credit and only receives a high-level credit summary. A free soft credit check doesn’t hurt your credit score in any way and won’t show as an inquiry on your credit report.

The Bottom Line

Both hard credit checks and soft credit checks play an important role in your personal financial health. This is because both types of personal credit inquiries are used by organizations, creditors, and lenders when assessing the creditworthiness of your company. Hard credit inquiries typically affect your personal credit score while soft inquiries won’t.

That makes staying on top of these credit inquiries important since, as a small business owner, your personal financial health impacts your business’s finances. You can use an online platform like that Nav that lets you check your personal credit score for free and gives you a summary of your business credit.

About the Author

Jordan Tarver

Jordan Tarver is a junior staff writer at Fit Small Business focusing on credit cards and bank accounts. Jordan brings over two years of experience in account management and price analysis in the mortgage industry to Fit Small Business. He is also an accomplished self-published author.

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SOURCE: http://fitsmallbusiness.com/hard-soft-credit-check/

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