In episode 2 of the Pursuing Points podcast my co-host Michael and I talked about how being involved with the credit card points and miles “game” forces you to pay closer attention to your overall financial health. Signing up for, spending money on, and managing your array of credit cards forces you to keep your finger on your financial pulse at all times. If you choose not to stay diligent, the consequences can be dire. One of the ways that you can stay on top of it all and keep your finger on your financial pulse is to check your credit score on a regular basis. To the uninitiated your first thought may be “But I heard that if I check my credit score it will go down!”. Therein lies the purpose of this post. You see, when your credit report is viewed either by say you, your employer, or a financial institution deciding whether or not to offer you a line of credit, an inquiry is placed on your report. However, not all inquires are created equal. There are actually two types of credit inquires that you may be subjected to the first is a soft inquiry and the second is a hard inquiry. One affects your credit, the other does not, let us explore which is which.
When you were applying for your last job did they ask you to fill out a form stating that you would give permission for the employer to check your credit? Have you ever used a free credit reporting website such as Credit Karma or Credit Sesame? Have you ever gotten a pre-approved credit card offer in the mail? In each of these cases a soft inquiry would’ve been the tool used by the employer/you/the credit card company to check your credit report. You see, when your credit report is viewed for reasons other than you applying for a new line of credit, a soft inquiry goes on your credit report. Soft inquires do not affect your report in any way, as they merely represent a simple request for information, they’re not being used to make a credit decision. In the pre-approved offer example a soft inquiry would’ve been used to determine if you’re pre-approved, but if and when you actually decide to apply for the card the financial institution will make whats known as a “hard pull” for your credit report, resulting in a hard inquiry, which does affect your credit. Why? Lets see…
You may be asking yourself “If they’ve done a soft inquiry for the pre-approval, why then must they then make a hard pull when I apply for the card?”. Thats a great question! The reason is that your credit score is supposed to represent your overall credit health. In our article on how your credit score is calculated we talked about how 15% of your score is dependent upon “New Credit”. The factor is a summation of all the times you’ve asked for a new line of credit; be it an auto loan, home mortgage, or new credit card within the last two years or so. Companies want to know how often you’re applying for additional lines of credit so that they may assess the risk you represent more effectively. If you’re applying for many lines of credit in a short period of time that is going to raise a red flag with the banks. The only way they can know if you’re applying for additional lines of credit is, you guessed it, by looking at the total number of hard inquiries that are present on your credit report. Generally these inquires fall off around 24 months after they’re initially placed. The initial addition of a new hard inquiry to your credit report will typically cause your score to drop a few points, but over time its effects tend to wear off so long as you’re using your credit responsibly.
Soft inquires are generally used when your credit score is being reviewed for reasons other than a request for new credit. Hard inquires are typically used when you’ve explicitly made a request for an additional line of credit. Therefore, checking your credit score on a website such as Credit Karma or Credit Sesame will not adversely affect your score, and its something you should get in the habit of doing more often than not.