Chances are, you’re going to open a line of credit at some point. As common as credit cards and loans are, many people don’t understand the terms, mainly if their credit history is new. One of these terms is “hard pull,” also known as a hard inquiry.
Is the name slightly aggressive? Yes.
Do they hurt your FICO score? Unfortunately, yes.
Are they a bad thing? Not necessarily.
Unlike a soft inquiry, a hard credit inquiry will slightly lower your credit score, understanding what they are and ensuring they are done sparingly will ensure that you avoid any long-term damage to your credit score.
Not only are we going to explain what a hard pull is, but we are also going to break down some of the nitty-gritty details about how credit works in order to provide you with some context. Having a strong credit score is extremely important, so the more you know about all things credit, the more you can do to build your score.
The Basics of Credit
Before we dive into hard pulls or soft pulls, for that matter, let’s have a quick refresh on some of the basics of credit. Some types of credit can be your best friend; however, a few irresponsible choices can turn it into your worst enemy. Essentially, credit is your borrowing capacity, based on your history of paying back debt towards money previously borrowed.
If you have a habit of paying off your debt on time, you will be considered to have good credit or “creditworthy”, which will allow you to borrow more money with lower interest rates. (side note, interest rates are an additional fee that borrowers pay lenders in addition to paying off their debt)
The way that lenders are able to determine whether or not you are “creditworthy” is by examining your credit score. Credit scores are based on your credit report, which credit bureaus provide. The common credit bureaus that you’ve most likely heard of include Transunion, Equifax, and Experian. These bureaus receive information from banks, credit card issuers, and other creditors.
From these reports, computer programs analyze your credit history and give you a three-digit credit score, boiling down your credit history into an easily digestible number. The higher your score, the more likely you are to qualify for credit.
Though this varies based on the scoring model, good scores are usually between 670-739, 740-799 is considered very good, and 800 and above is considered excellent. Conversely, those with a credit score of 580 or below are considered to have poor credit and will likely have difficulty finding success with lenders.
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What Affects Your Credit Score
Your credit score is a culmination of several different factors, hard pulls being one of these. The other five are:
- Payment History
- Amounts Owed
- Credit History
- Credit Mix
- New Credit
This is the most important piece of your credit score is your payment history since it counts for 35%, the largest percentage of the bunch. This allows lenders to see that you have a good track record of paying off your credit on time. Making late payments will result in points being docked.
Owing money can hurt your score. A large amount of debt can signify to lenders that you have a higher risk of default. Amounts owed are nearly as significant as payment history, making up nearly a third of your credit score.
While credit history isn’t required to receive credit, having a longer credit history gives lenders more opportunity to see whether or not you are a trustworthy borrower. Not only does credit history depend on when you opened your first account, but also how long you’ve had each line of credit.
This takes into consideration the different kinds of credit accounts you have. While you’re not required to have diverse kinds of credit, having a diverse range of credit types will show borrowers that you are responsible enough to handle various kinds of credit.
What is a Hard Pull?
A hard pull, just like all of the factors mentioned above, impacts your credit score and is a part of the ‘New Credit’ section of your credit score, which makes up 10% of your overall score. Hard pulls happen every time you apply for a new line of credit.
So, for example, if you’re looking to set up a new credit card, the lender will make a hard pull. Essentially, all a hard pull means is that a creditor has requested to look at your credit report.
To see if you qualify for a line of credit, creditors check credit reports to make sure that their borrows are trustworthy and have a history of responsibility for paying off debt. When a creditor makes a hard pull, the hard pull is listed on your credit report. As a result, your credit score will take a modest hit. Typically credit pulls will not lower your score by more than 5 points.
Reasons for Hard Pull
You may be wondering why a hard pull results in your score taking a hit. Just because you’ve applied for a new line of credit doesn’t mean that you are an irresponsible borrower, right? However, in most cases, having lots of credit applications can show that you are looking to take on more credit than you can realistically payback.
When Do Hard Pulls Occur?
The most common times a hard pull will occur are when you are applying for:
- Credit cards
- Car loans
- Personal loans
- Student loans
- Apartment or rental applications
In certain cases, it’s common to apply for credit from different lenders to compare rates. This is referred to as “rate shopping,” and contrary to what you may think won’t tank your credit score. We will go into more detail on rate shopping in a later section.
Hard Pull vs Soft Credit Inquiry
Earlier in the article, we briefly mentioned soft credit checks. Soft credit pulls are different from hard pulls in that they don’t show up on your credit report or affect your credit score. Some examples of when soft pulls occur are when you check your own credit score, when creditors pre-approve you, when employers run a background check, and when you apply for insurance.
Checking your own credit score can help you be more aware of your current credit position, as well as what lenders see when they perform a hard pull. Several internet ebsites provide your free credit score and a free credit report once a year.
How to Minimize the Effects of Hard Pulls
As we mentioned, maintaining a strong credit score is incredibly important, so anything you can do to keep it as high as possible is worth it. Monitoring the number of hard pulls you have and the timeframe in which they occur can help. Earlier, we mentioned that applying for multiple lines of credit at once may be necessary if you want to compare rates among different lenders. Luckily the credit bureaus actually recognize this as “rate shopping” and won’t penalize you for it.
The window for rate shopping is typically two weeks. So, if you apply for several different car loans within a two-week period, it will be evident that you are loan shopping and will show up as one hard pull rather than many. However, it’s important to note that rate shopping is only accepted for things like home and auto loans.
Applying for several different credit cards all at once is instead considered risky behavior, so it is recommended that individuals spread credit card applications out by six months. If you do end up with several hard pulls on your credit score, it’s not the end of the world, as hard pulls only last on credit scores for up to two years, and commonly only one year.
Although it is extremely uncommon, a fraudulent hard pull will occur on your credit report once in a blue moon. If this occurs, you can report the inaccuracy to the credit bureau, which will investigate the case. Investigations typically take up to 30 days, and if the hard pull is genuinely fraudulent, it will be removed from your report.
In a nutshell, hard pulls harm your credit score for a short time period. However, they are not something to be feared and are instead a normal part of applying for lines of credit when purchasing a home or car. Remember too that you can look at your own credit report without your score taking a hit.
Keeping track of your credit score and knowing what is on your credit report will help you make sound financial decisions and ensure that you can continue to qualify for credit with reasonable interest rates. While it may seem burdensome, maintaining a high credit score will provide you with the financial freedom to pursue whatever your heart desires.