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WalletPrep worksheet · Credit

What's the difference between a hard and soft credit check?

Name ____________________ Date __________

Key ideas

  1. Applying for credit is a hard check. Hard inquiries can lower a score slightly. FICO says one inquiry takes fewer than 5 points off for most people.
  2. Checking your own credit is always soft. Your own checks, prequalified offers and reviews by lenders you already use don't affect your score, and other lenders can't see them.
  3. Rate shopping counts as one inquiry. FICO groups mortgage, auto and student loan inquiries within 14 to 45 days into one. Kai's three car loan applications counted once.

Vocabulary

Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Hard inquiry
A credit check made when you apply for credit, like a card, loan or mortgage. It can lower your score a few points for a while.
Soft inquiry
A credit check that does not affect your score, like checking your own credit or a lender sending you a preapproved offer.
Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Credit freeze
A free block on your credit report that stops most new lenders from seeing it, which makes it hard for a thief to open accounts in your name.

Work it out

Kai needs a $25,000 car loan over 5 years. Within 10 days she applies at the dealer, her bank and a credit union. Assume quotes of 8%, 7.25% and 6.5%.

  1. Applications in 10 days
  2. Counted by FICO as inquiries
  3. Interest at 8%, 60 months
  4. Interest at 6.5%, 60 months
  5. Saved by shopping

Check yourself

  1. Which of these is a hard inquiry?

    • A. Checking your own credit score in an app
    • B. A prescreened card offer in the mail
    • C. Applying for an auto loan
    • D. Your current card company reviewing your account

  2. Loan quotes cost $5,415 and $4,349 in interest. How much does picking the lower one save?

    • A. $1,066
    • B. $966
    • C. $4,349
    • D. $1,166

  3. How long do hard inquiries affect FICO scores?

    • A. 30 days
    • B. 7 years
    • C. 2 years
    • D. 1 year

Your turn

Pull your free credit reports and read the inquiries section on each. Write down any hard inquiry you don't recognize and dispute it with that bureau. If you aren't applying for anything soon, freeze your credit at all three.

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Answer key

What's the difference between a hard and soft credit check?

Work it out

  1. Applications in 10 days3
  2. Counted by FICO as inquiries1
  3. Interest at 8%, 60 months$5,415
  4. Interest at 6.5%, 60 months− $4,349
  5. Saved by shopping= $1,066
  1. At 8%, 60 payments of $506.91 cost $5,415 in interest. At 7.25% it is $4,879, and at 6.5%, 60 payments of $489.16 cost $4,349.
  2. Taking the lowest quote over the highest saves $5,415 − $4,349 = $1,066 in interest.
  3. All three applications came within 10 days, so FICO counts them as one inquiry, worth fewer than 5 points for most people.

Check yourself

  1. C. Applying for an auto loan Applying for new credit triggers a hard inquiry. The others are soft inquiries and don't affect your score.
  2. A. $1,066 $5,415 − $4,349 = $1,066.
  3. D. 1 year Hard inquiries stay on your report for up to 2 years, but FICO scores only count them for 1 year.