The name says it all. Would you rather sleep on a hard mattress or a soft mattress? Would you rather cuddle with a soft, fluffy bunny or a pet rock? Soft is almost always better: pillows, sheets, exams, and also credit inquiries. In most cases, the reasons are obvious, but why do hard credit inquiries negatively affect your credit score, and what’s the difference between a hard inquiry and a soft inquiry? In this article, we delve into the details to shine a light on this credit score conundrum.
What if I told you that credit card companies and lenders are secretly running your credit every day? It probably sounds terrifying, right? But actually, it’s completely harmless because they’re pulling soft inquiries, also known as soft pulls. A soft pull is when a lender examines relatively vague data from a large database of individuals to determine who might be pre-qualified for offers. Whenever you receive offers to activate a credit card in the mail, those are the result of soft inquiries. Just because you have that shiny plastic card in hand doesn’t mean you’re guaranteed to be able to open an account. It means that based on the limited data the company has received, you may be qualified. You still have to call the company to verify, at which they will make a hard credit inquiry.
Hard inquiries are the scary ones. They occur when you give a company permission to check your credit report. Companies need to look at your credit report to determine whether lending to you is a safe bet. The two most important factors they look at are whether you pay your bills on time and whether you use your credit to its max limits – low credit usage (under 25%) is preferable. Together, these factors make up over half of your credit score. In addition, your length of credit history accounts for 15%, credit mix 1%, and finally, new credit is 10%.
New credit means any recent hard inquiries. The reason the number of inquiries matters so much is because it shows that you are looking for new lines of credit. People look for new lines of credit for different reasons; most of the time, those reasons are perfectly normal and harmless. For example, you might be looking to buy a new house or car or get a new credit card. All of these activities require a hard pull.
For this reason, having a single hard inquiry on your report may not affect your score at all because it isn’t really an indicator of risky financial behavior. Having several hard inquiries, on the other hand, will definitely affect your score because that’s a red flag to lenders. It makes them wonder, ‘why does Bob keep applying for credit cards’ or ‘why does bob keep buying cars?’ It represents uncertainty and risk. Just think: which friend would you rather lend money to, the friend who always offers to pay for dinner at restaurants or the friend who always lets someone else pay? When lenders see someone borrowing money often over an extended period of time, they see the second friend.
That being said, even having multiple hard pulls on your account isn’t always a bad thing, and it doesn’t always have a significant effect on your credit score. For example, when buying a home, you might seek mortgage offers from multiple lenders in order to find the best deal. For this reason, FICO and Equifax lump inquiries occurring within a short period together, showing them as one inquiry. So, if three mortgage companies pull your credit within a month, it will only go on your credit report as one pull, so your credit score will only go down ten points rather than thirty points.
Hard inquiries sound scary, but they’re really not that bad. If you’re a financially responsible person, then lenders want your business. For that reason, hard credit pulls will usually only have a notable impact if your credit score is already low or you have a very short credit history. Barring those two factors, the effect on your score should be so minimal that the extra line of credit you receive often balances out any negative impact because your percentage of credit utilization will go down.
How Hippo Can Help
Hippo Lending provides doctors and nurses with lending options that others can’t. How? Hippo Lending uses a value-based business model that prioritizes helping healthcare professionals accomplish their life goals, whether that’s owning your own practice, or consolidating your debt into a low interest monthly payment you can spend time enjoying life rather than balancing your budget. Rather than a simple “yes or no” approval system, we take the time to review your loan request with you and discuss lending options that fit your needs while not straining your wallet. We understand a doctor’s income and provide flexibility that banks can’t when considering your request. And if we are unable to provide a loan, we will provide you with guidance on how to get one in the future
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