Over the last few days, I’ve received a ton of questions about so-called “hard pulls” and “soft pulls” on your credit report and how they affect your credit score. In order to get the full scoop, I did some extensive research on the subject, and here’s the best information I can find. Let’s start off with the basics.
What Is a Credit Report?
A credit report is a record of your borrowing and repayment history. This includes details about lines of credit, late payments, bankruptcies, credit defaults, and so on.
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In the United States, three companies, called credit bureaus, are in the business of maintaining credit reports on each person who obtains any form of credit or debt. These three credit bureaus – Experian, Equifax, and TransUnion – effectively operate in the same fashion. They have arrangements with almost every major financial institution to report to them the status of their consumer debts. These companies then collect this information and create reports on individuals, then sell these reports to other companies who are interested in issuing credit or loans.
So, for example, let’s say you have two student loans and no other debt. The student loan companies have shared the status of your loan with the three credit bureaus (this is standard procedure, part of the agreement you signed), and the three bureaus have assembled reports on you containing information about these debts. Then, you apply for a credit card. The credit card holder contacts one (or more) of these bureaus and retrieves your report, showing you have two student loans, how much you owe on each, and whether you’ve kept up with your payments. They’ll use this information to decide whether to issue you that credit card.
Because this information is shared by … well, almost everyone, it’s financially worthwhile to keep your nose clean. All sorts of companies rely on your credit report to determine what to charge you and how big of a risk you are, from insurance to mortgage and car lenders. If you make late payments, sign up for mountains of credit cards, or default on your loans, you’re seen as a pretty big risk, and you’re going to be charged more for many services because of it.
Why are there three separate credit bureaus if they operate in almost the same exact fashion? For starters, the three companies collect and report information largely independently of each other (there is limited data sharing, but not full). This is actually useful for you, the consumer, because if one company makes a mistake, then the other two companies can be used as supporting evidence of an error. If just one company existed, it would be somewhat harder to identify and prove errors.
What Is a Credit Score?
A credit score is just a single number that summarizes most or all of the information in your credit report. Think of it as an “executive summary” of your credit report – all of the information boiled down to just one number.
Why is my Equifax score different from my Experian and TransUnion credit scores?
There are several reasons for variations in your credit score among the different credit reporting agencies and even among different credit grantors:
- First, your credit score from each credit reporting agency is based on the information in your credit file at the credit reporting agency, and the credit history information each credit reporting agency has about you can differ. This can result in your score at the other credit reporting agencies being different from your Equifax score.
- Second, there is a slightly different FICO credit scoring model at each of the three nationwide credit reporting agencies due to the differences in credit history information they each have about you. Remember: your FICO score at a given credit reporting agency is only based on the credit data that credit reporting agency has about you.
- Third, although the FICO® credit scoring model is the score used most often by lenders, each of the credit reporting agencies, including Equifax, has their own scoring models. These other models may evaluate your credit file differently from the FICO® model and, in some cases a higher score may mean more risk, not less risk as with FICO® scores.
The “FICO” mentioned above refers to the Fair Isaac Corporation, a company that developed a fairly standard method for calculating a credit score. Their methods are in standard use by all three bureaus (with slight variations, as mentioned above) and by all of the other lenders and credit-issuing companies that use these reports.
Surely we must know something about how it’s calculated! Fair Isaac has a very consumer-friendly site about FICO scores called MyFICO, which tells us that your FICO score is a weighted calculation based on these five categories:
- Payment history (35%): The single biggest factor in your credit score is your history of making payments on time. If you miss a payment on any debt, it’s going to hurt your credit score – it’s that simple. Miss a few payments, or if your payment is more than 60 days or 90 days late, and the impact is even worse.
- Amounts owed (30%): The size of your balances as a proportion of your credit limit — called your credit utilization rate — is the second biggest factor in your credit score. This is actually something you can address very quickly: Simply by paying down your balances, you’ll improve this portion of your credit score.
- Length of credit history (15%): The longer your credit history, the more reliable you appear. This is why it’s usually not a smart idea to close your oldest credit card account, even if you no longer use it.
- New credit (10%): When you apply for a car loan or open up a new credit card – or a bunch of them – that can temporarily dent your credit score.
- Types of credit used (10%): In general, lenders would like to see a mix of installment debts — such as a mortgage, car loan, or student loan – as well as revolving debts (e.g., credit cards) when it comes to your credit score, as opposed to just credit cards.
This provides a general recipe of things you can do to keep your credit score high (and your credit report clean).
What Is a ‘Soft Credit Check’ (or Soft Pull) and a ‘Hard Inquiry’ (or Hard Pull)?
The terms “hard pull” and “soft pull” are very generic terms that describe different features offered by the three credit bureaus. “Hard pull” and “soft pull” each refer to a specific kind of credit report check offered by the bureaus.
In general, the big difference is that hard pulls are ones where you’ve granted permission, they indicate that you’re actively seeking credit, they show up on your credit report for everyone to see, and they tend to have a slight negative impact on your credit score.
A soft credit check, on the other hand, doesn’t require your permission, doesn’t indicate anything about your interest in seeking credit, only shows up on the credit report you see, and has no impact on your credit score.
Let’s look at the offerings from each company.
TransUnion refers to “hard inquiries” and “soft inquiries” that generally match the definitions described above. Here’s what they have to say:
What are inquiries?
An inquiry is a record of someone checking your credit information. Inquiries come in two distinct categories: “hard inquiries” that occur when a business views your credit report for the purpose of an application and “soft inquiries” that occur when your credit is checked for other reasons. If you apply for a new credit card, a hard inquiry record will appear on your credit report and may impact your credit. When you check your own credit report, or when it is checked for a pre-approved marketing purpose, it is considered a soft inquiry and will not harm your credit score.
Experian does much the same thing:
Requests by others to view your credit history will show you who has received information from your credit report and who was given your name during the recent past, as allowed by law. According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may inquire about your credit information without your prior consent. This section includes the date of the inquiry and how long the inquiry will remain on your report.
On your personal credit report ordered directly from Experian, information about those who inquired for the purposes of extending a pre-approved credit offer are included for your information. These inquiries are not revealed to creditors and do not impact your ability to obtain credit.
Equifax makes it a bit more confusing:
Inquiries are a record of companies and others who obtained a copy of your Equifax credit file. The Fair Credit Reporting Act (FCRA) requires that Equifax disclose to you who requested copies of your credit file. Depending on the reason your credit file was accessed, Equifax generally retains these for one to two years.
Some types of inquires you might see on your Equifax Credit Report™ are not reported to others or used in credit score calculations. These include:
- PRM Inquiry. A promotional inquiry in which your name and address were provided to a person who made you a firm offer of credit or insurance, such as a pre-approved credit card offer. These inquiries generally remain on your credit file for 12 months.
- AM or AR Inquiry. An Account Monitoring or Account Review inquiry in which one of your creditors performs a periodic review of your credit file in connection with reviewing your account. These inquiries generally remain on your credit file for 12 months.
- Equifax, ID, ACIS, or UPDATE Inquiry. Internal inquiries that indicate Equifax’s activity in response to your contact with us, for either a copy of your credit report or a request for research. These inquiries will generally remain on your file for 24 months.
To summarize, all three companies allow others to access your report and also record those who access it. A good rule of thumb is whenever you give someone permission to look at your credit report, it will be on your credit report for everyone to see and will have a slight short-term negative affect on your credit score. Those are generally referred to as “hard pulls” – anything else (where you didn’t give permission) is a “soft pull” and won’t affect your credit score.
Recently, many banks have begun doing a hard inquiry on your credit report when you sign up for a new savings or checking account (asking for permission in the initial agreement). Not all banks do this (yet), but a sizeable number do.
Another tip: If you’re shopping around for a mortgage or an auto loan, don’t worry about hard pulls. According to Trans Union, the FICO model accounts for this:
You can still shop around for a loan; multiple inquiries for the same purpose in a short amount of time are commonly grouped into one less harmful inquiry session. Inquiries are also helpful for consumers because they can notify you of a potential identity thief applying for accounts in your name.
In general, you shouldn’t worry too much about the occasional hard pull, especially if you don’t have any major loans coming up. The “cost” of a hard inquiry is slight on your credit score, often not nearly enough to impact anything. You should only worry if you’re applying for a bunch of different kinds of credit very quickly or if you are looking at a major loan in the near future.
What Can I Do to Improve My Credit Score?
There are several very basic things you can do to keep your credit high, and the tips come from the components of the FICO score mentioned above. In other words…
Pay your bills on time. Don’t get behind on any of your bills. Pay them on time and make sure that at least the minimum payment is made.
Keep your debts low. Don’t push your credit cards to the maximum. Instead, keep the balances as low as you can.
Keep your oldest credit cards. If you cancel your oldest card, you reduce the length of your credit history. Keep it around with a zero balance in a safe place.
Don’t apply for new credit cards on a whim. For example, if you’re at a store and you’re being offered the store credit card, just say no, especially if you’re going to be using your credit report for something else in the near future.
Having no debt but credit card debt looks bad, too. If you have a bunch of credit cards and no other debts, you look potentially risky. If you are debt free, keep the credit card count low.