Understanding Soft Credit: What It Is and How It Works

• Introduction to Soft Credit: What is a soft credit check?

What is a soft credit check? When a consumer applies to a loan or credit line at a financial institution or business, whether it is for a credit card, a car loan or a mortgage, or even credit for purchases at a store, the lender will always check their credit score, in order to gauge the credit worthiness of the consumer via a credit report. These credit reports are collected and compiled by various credit bureaus that offer credit monitoring services. Credit bureaus will provide reports that details information about a consumer’s financial history and behavior and finally, assign a score. Details such as the amount of credit they currently have, their credit or financial standing with different institutions, any negative behavior and marks like debts in collections, late payments, and more, are reflected here. All this information helps credit lenders and businesses assess whether to approve or reject a consumer’s request for credit.

It is easy to see then how credit monitoring and credit scores play a vital role in the US financial system and consumer behavior. By collecting and providing information on consumers, and assigning a credit score, credit monitoring by credit bureaus directly aids consumers and lenders alike in facilitating loans and new credit lines, by adding a much-needed layer of transparency to the engagement.

A good credit score will open channels of credit to the consumer whether it is via credit cards or different types of bank loans. Conversely, a bad credit score will result in outright rejection of a loan or credit request and may even hurt your score even further.

Soft credit, referred interchangeably as a soft credit inquiry, or a soft pull, or a soft credit check, allows consumers to check their credit score, verify information and identify any negative marks before going to a lender and avoid rejections. As opposed to a hard credit check or hard credit inquiry that is done by the lender at the time of the application, soft credit check does not work against the consumer.

Soft Credits vs. Hard Credits: Key Differences 

As noted, there are two types of credit score inquiries: a soft inquiry report and a hard Inquiry report. Several major key differences exist between them. Namely, in how they impact your credit score, who can request and view them, and ultimately, what their use or purpose is. It is important for consumers to know these key differences to help manage your credit score and financial standing more wisely. But also, to avoid any unnecessary negative impacts on your credit score. Below we dissect the two types of credit inquiries:

-Soft Credit Inquiry

A soft credit inquiry occurs when the consumer or individual checks their credit report and score outside of a credit or loan application event with a lender or financial institution. Soft credit inquiries are only visible to the consumer. Usually this is done online on platforms like the already mentioned Credit Karma. Soft inquiries are a great way to pre-qualify and prepare for an actual application, without risking unnecessary negative impacts. Common examples of soft credit uses are employer background checks, personal credit checks, pre-approved credit card and credit line offers.

-Hard Credit Inquiry

A hard credit check or inquiry happens when a consumer goes to apply for a credit line or loan, and the lender pulls their credit report from the credit bureaus at the very moment of application. Hard credit inquiries are visible to lenders. It is considered “hard”, because it is happening against the backdrop of an application. Unlike soft credit inquiries, hard credit pulls can indeed negatively impact your credit score. Albeit relatively minor impact. However, with multiple hard credit pulls in a short time frame can in fact hurt your credit score and raise red flags to potential lenders. Multiple hard pulls in a brief period of time usually indicate financial distress to lenders.

How Soft Credit Inquiries Affect Your Credit Score

There are several persistent myths and misconceptions about soft credit inquiries. Because soft credit checks are an important tool to help monitor credit scores and catch inconsistencies, as well as any unauthorized checks and marks on your credit report, let's take time to dispel a few and clear things up.

Soft Inquiries Lower Your Credit Score
False. Despite what you may have heard, soft credit inquiries do not affect your credit score. There is no negative impact from requesting a soft pull. This is their main advantage and what makes them the perfect tool for consumers looking to prepare or at least thinking about applying for a financial credit line or loan. Since soft inquiries are harmless, you can check your credit score as often as needed.

You may be wondering, however, why do soft inquiries not affect your credit score?
Mainly, because soft inquiries are used for background checks and personal credit score checks rather than lenders making actual, on the spot credit decisions. Another way to put this is, soft credit checks do not indicate new borrowing or financial risk. As a result, credit institutions like FICO and VantageScore, will ignore them at the moment of calculating your credit score.

Lenders Can See Soft Inquiries and Use Them Against Consumers
False. Lenders cannot and do not see any or all soft inquiries you may have requested. Lenders can only see hard inquiries which, as noted, are a result of applying to credit lines and loans.

Soft Inquiries Are Permanent Marks on Your Credit Report
Again, this is false. Despite soft inquiries showing up on your credit report up to 2 years, they have no negative impact and are only visible to the consumer not the lender.

All Credit Checks Are the Same
False. As noted above, soft inquiry and hard inquiry are different in several ways. Whereas hard inquiries occur when applying for a loan or credit line and can lower your credit score slightly, soft inquiries do not hurt your credit score at all and occur outside of a loan application process.

Pre-Approved Credit Cards Offers Are Automatic Approvals
Not quite. Although pre-approved offers generally result from a soft credit check by lenders, it is still not guaranteed. Keep in mind that if you accept the pre-approved offer and you formally apply to it, the lender will then process a hard inquiry check.

When Are Soft Credit Checks Used?

Soft credit checks or soft pulls are routine credit checks and are sometimes used without the consumer’s or individual’s knowing about it or explicit permission. As stated before, soft credit checks unlike hard credit checks do not impact a consumer's credit score. So, when are soft credit inquiries used? Under what type of scenarios would a soft pull be ideal?

Here are several scenarios and examples under which a consumer or an institution would use a soft credit inquiry:

1.Personal Credit Monitoring
Individuals and consumers often monitor their credit score to gain insight and overview of their financial standing, check their credit health, identify and review negative marks, detect instances of potential fraud and ensure overall credit report accuracy. Personal credit monitoring or soft inquiries are typically done through credit bureaus like TransUnion, or Equifax and Experian. It is always helpful to do a credit report comparison of all three, as sometimes information can differ among the credit bureaus.

2.Employment Background Checks
When applying for certain jobs, many employers will often perform soft credit inquiries as part of the employment background checks to assess financial responsibility, excessive debt or missed payments and other potential red flags. These instances of soft pulls usually occur in industries like finance and banking, or security sensitive industries like government and civil service for example.

3.Pre-Approved Credit Offers
Financial institutions like credit card companies and banks and other lenders will conduct soft credit checks on individuals, typically without their knowledge, to determine whether an individual qualifies for pre-approved credit lines or other financial products.  The reason behind this soft pull is so that lenders and banks can extend their offers to consumers without negatively impacting an individual's credit rating.

4. Insurance Credit Rating
In the insurance industry it is common for auto and homeowner insurance companies to use soft credit inquiries in their calculations of insurance premiums. A good credit score and history will often benefit the consumer and will lower insurance premiums.

5. Screening of Tenants by Landlords
When applying for an apartment or home for rent, landlords will most certainly screen their potential tenants and perform background checks that include soft credit inquiries. Under this scenario, landlords will look at an individual’s credit report and scan for past evictions, financial stability, late payments history and other information that helps determine whether a person could be a reliable tenant and therefore, a good fit.

How to Check Your Credit Reports Without Impacting Your Score 

There exist several ways to check your credit score without impacting your score. Credit reports and scores can be obtained directly through any one of the three major credit bureaus: Equifax, Experian and TransUnion. Keep in mind that as long as you do so online and when not applying for a credit line or loan, a soft credit check will never hurt your credit score and only help you monitor your financial standing.

In addition to directly going to each credit bureau individually, there are also online platforms available where one can request and compare all or most of your credit reports and scores at once. For instance,  Credit Karma and FICO offer free versions of this service, in addition to paid subscriptions that allow for more benefits beyond simply checking your credit report. These two sites serve as great tools to keep track of your credit score across all three bureaus and make soft inquiries or soft pulls when needed.

Finally, there is one more site worthy of mentioning: AnnualCreditReport.com. By Federal law, every consumer is eligible to receive one free credit report from each of the three bureaus every 12 months. Annualcreditreport.com provides that free service.

Whether you are using free online third-party providers like Credit Karma or direct requests to bureaus like Equifax, leveraging these tools for soft credit inquiries can help you consistently monitor your credit history report with no impact to your score. You will also be able to stay on top of your score to help you plan your financial activities and behavior so that you know when you are ready to apply for credit lines and loans. So, whether you want to apply for a credit card, a personal loan or an auto loan, these tools provide the best way to keep control over your credit reports and credit scores.

 Soft Credit Inquiry for Businesses and Lenders

Soft credit inquiries and credit checks provide businesses, financial institutions and lenders with powerful tools by helping review a potential borrower’s credit history to improve decision-making while reducing financial risk and enhancing customer engagement. All without negatively impacting consumers’ credit scores.

For Businesses, these tools offer various benefits. Main advantages include a risk assessment without any form of commitment, pre-qualification for their services and/or products, an improved customer service experience and lastly a great way to prevent fraud.

Credit Risk Assessment: Soft checks enable businesses to evaluate potential customers’ credit worth before extending offers, ensuring they engage with financially responsible individuals.

Pre-Qualification for Services: Credit card companies can offer pre-approved credit cards, loans, or financing options based on soft checks, attracting more customers without harming their credit scores.

Improved Customer Experience: Since soft inquiries don’t affect credit scores, using soft credit checks will make customers more likely to engage with businesses who are offering credit-related services. This has the impact of reducing hesitation, doubts or concerns about their financial products and improving conversion rates for businesses.

Fraud Prevention: Soft checks are extremely helpful for businesses and lenders to identify risky applicants early on. This will be beneficial to prevent fraudulent accounts or transactions before they happen.

Likewise, for Lenders, soft pulls also offer various benefits. Main advantages for lenders include allowing for an efficient and secure screening process of potential borrowers and consumers, fomenting stronger customer relationships, ensuring regulatory compliance, and increasing the rate of credit approvals among more low-risk consumers.

Efficient Screening Process: Lenders can efficiently filter out high-risk borrowers before initiating formal applications, saving time and resources, to focus on higher converting potential consumers.

Stronger Customer Relationships: By using soft checks to offer pre-qualified loans or credit lines, lenders build trust and transparency with borrowers. Trust and transparency, especially among financial institutions and lenders, is vital to reduce hesitancy by the borrower.

3. Regulatory Compliance: By federal law and regulations certain lending practices require credit assessments without formal application. Soft credit checks allow lenders to meet and comply with regulatory requirements while protecting consumers’ credit scores.

4. More Approvals with Lower Risk: soft credit pulls allow lenders to extend tailored offers to lower-risk borrowers. This allows for an increase in approval rates while managing default risks effectively.

Conclusion: Making the Most of Soft Credit Inquiries 

Credit monitoring is a vital activity and healthy financial habit that every individual and consumer should exercise.  The most important tool a consumer can leverage to assess one’s credit score, score, and financial history is to perform soft credit inquiries, or soft pulls, on one’s credit report. Unlike hard credit inquiries, that occur at the moment of applying to a financial loan or credit line and will hurt a consumer’s credit score; soft credit inquiries do not negatively impact your credit score and occur outside of a loan application.

Consumers can perform soft credit checks through several ways. Either directly through each one of the three credit bureaus, Equifax, TransUnion or Experian, or through third party providers. Third party providers like Credit Karma are not only free but also allow for a comparison of your credit report and scores across all the bureaus.

Soft credit checks remain an important tool for lenders, businesses and consumers alike. It is just as vital to know how to use them wisely. Soft inquiries are best used for personal credit monitoring. For example, you perform a soft pull to check your financial history to identify mistakes or fraudulent activity, clean up your record, and more to maintain a strong credit profile.

You can also perform soft pulls to check your score before going to the lender or business to make sure you qualify for the loan and avoid rejection and any unnecessary negative impact on your credit. Keep in mind, if you go to the lender, they will perform a hard pull and that will hurt credit. If you get rejected for the credit line, the negative impact from the hard pull would have been for nothing.

Maintaining a strong credit profile is financially advantageous for any consumer and can provide many financial benefits. It not only opens new credit opportunities, but it also means lenders and businesses will offer significantly more favorable rates, terms, qualifying amounts and other benefits. To help build and maintain a good credit profile it is important you display responsible credit use: pay your various bills on time including rent but also loans like mortgages, auto and other forms of credit obligations. To build up your credit further, inquire with your bank about accessing small credit, or open a small manageable loan and pay on time. Most of all avoid having unpaid debts and especially debts in collections that can severely hurt your credit score.

If used wisely, soft credit inquiries can be a powerful leverage to maintain, monitor and strengthen your credit score and financial history.

FAQ's 

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1. Does a soft credit check appear on my credit report?

Yes. A soft credit check does in fact appear on your credit report. However, only you can see the soft credit check. Lenders and other businesses cannot. It does not impact your credit score nor is it used to assess your credit score or credit worthiness. 

2. Can lenders see my soft credit inquiries?

No. Soft credit inquiries cannot be seen by lenders or by any financial business. Only you can see your soft inquiries. 

3. What’s the difference between a soft credit check and a credit freeze?

A credit freeze is a security measure that blocks access to your credit reports. It does not lower your credit score, but it does prevent lenders and businesses from performing credit checks for loans or pre-qualifying deals. Lenders will not be able to view your report under a credit freeze. A credit freeze can be requested only by the individual as a security measure to protect from fraud and no one else. A credit freeze can be in place until you request to lift it or remove it.

A soft inquiry is a review of your credit report that does not affect your score. While you can request a soft credit check for personal reasons, like monitoring your credit report, lenders and employers can also perform a soft credit check for pre-approved credit lines and background checks. Only you can see soft credit inquiries while lenders and businesses cannot

4. Do employers need my permission to perform a soft credit check?

No. Employers do not need your permission to perform a soft credit check for a background check. Other entities that do not need your permission are credit card companies, for pre-approved products, and landlords for approving a lease or rental agreement.

5. How long do soft credit inquiries stay on my credit report?

Soft credit inquiries usually stay on your credit report for about 12 months to 24 months. During that period, they are automatically removed with no further action needed by the consumer. However, their presence does not affect your credit score in any way.

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