Hard Pull vs. Soft Pull: How They Affect Your Credit
If you’re a small business owner thinking about applying for a loan, you know the importance of a good personal credit score. You might have already applied for a traditional loan and been denied on the basis of your credit score. While you can work with alternative lenders, you still might want to bring up your score.
Even if you’re doing everything right – making on-time payments, lowering balances on revolving lines of credit, and working to clear tax liens off your record – your credit score can be hurt by one simple thing that most people don’t even consider. And it has nothing to do with your spending or cash management habits.
The simple act of someone checking your credit report impacts it negatively. Whether or not a credit check appears on your credit report depends on if it was a hard pull or a soft pull of your credit report. Small business lenders should be aware of the difference between the two types as part of managing their credit and when they plan on applying for a business loan.
Hard Pull of Credit Score
A hard pull of your credit score is a credit inquiry which will appear as part of your credit report. It tells other potential lenders that you have been looking into obtaining financing.
While a hard pull of your credit score typically only causes a five-point dip which impacts your score for roughly six months, it will stay on your report for one to two years, the length of time varies by credit bureau. Experian retains this data for two years, while Transunion only keeps a hard pull on your report for one year.
Whether or not you took out the business loan or opened the credit card that is associated with someone checking your credit report is irrelevant. The mere fact that someone checked it penalizes you. Because some lenders only check with one of the credit bureaus, instead of all three, hard pulls could be the reason for slight differences in your score between the bureaus.
Be aware that while a hard pull only impacts your score by five points, if you apply for too many different forms of credit during a short time it can add up. Apply for a car loan, a credit card, a mortgage and a business loan in the same two to three-month time frame, and you could watch your credit score dip by 20 points.
Does this mean that rate shopping hurts my credit score?
It is not uncommon for potential borrowers to rate shop, i.e., apply with several different lenders to find out who will offer them the best rate and terms. Credit bureaus know that consumers want to be able to compare between lenders without being penalized. Therefore, if you apply for the same type of loan with 30 to 45 days, they will typically treat all of the applications as one serious inquiry.
The key is that you are applying for the same type of credit. In the above example, a car loan, a credit, a mortgage, and a business loan are all different types of credit. Even if you applied for them within the 30 to 45 day period, you would be penalized for each. However, if you submitted an application for a business loan with four different lenders in the same time period, you would only see a five point dip in your credit score.
So how do I rate shop without it hurting my credit score?
In reality, 30 to 45 days is not a long time in the traditional lending world. If working with a traditional lender, it can take months to be approved if you are requesting a significantly large sum. Often, if several months have gone by, they will pull your credit report again at the end of the loan approval process just to verify that nothing has changed. Alternative lenders are accustomed to processing, underwriting and approving loans in a much shorter time frame.
Minimize the risk that a hard pull of your credit report will fall outside the 30 to 45-day window. Research lenders’ rates, fees, terms and conditions before beginning the application process. Have all the possible documents that you will need in your loan application package already pulled together, and copies made of them. Preparation is key to staying inside that window.
Another advantage to taking the time to prepare before applying is that you will learn which lenders work with businesses in your industry and lenders in your financial situation. You do not want to waste time applying with a lender who would never lend to you on the basis of your industry type or credit score.
Once you are confident that you have everything you need and a list of possible lenders, begin the application process. Make sure that you have enough free time in your schedule to respond quickly to any lender questions or requests for additional information. And if the lender provides you with a checklist of required documentation, follow it to the letter. If your loan application is sent back from underwriting, it extends the length of the application process.
Savvy consumer’s rate shop, but they must do so keeping their credit score in mind.
Does the type of credit that I’m applying for matter?
Yes, unsecured inquiries such as credit cards or lines of credit have the most adverse impact. That is because there is no collateral, such as a house or car, securing the credit. Thus, this type of credit is considered riskier because it is harder for a lender to recoup their money should you default.
As well, applying for too many credit cards or business lines of credit within a short period of time may indicate that you’re having money issues and desperately trying to access capital. It is a warning sign. This is one of the reasons that credit bureaus keep hard pulls of your credit score on your report. If you apply for a business loan a year later, the lender can see a flurry of applications at one point in the past and will know to inquire further about past cash flow issues.
Who typically performs a pull of my credit score?
The Fair Credit Reporting Act restricts when and why your credit can be pulled. The list includes government agencies and creditors.
If someone is responding to a court order in a divorce, they can pull your credit report. Similarly, child support agencies have access to this information. As well, if you have applied for any type of license or other state or federal benefit granted by the government, they can check your credit score.
Current creditors can also access your credit report. Some lenders check your credit monthly or quarterly to monitor your debt ratio and proactively stay on top of your ability to repay them. Collection agencies or those creditors trying to collect on an existing credit obligation also have the right to pull your credit report.
Anyone who can prove a legitimate business need for the information will be granted access to your credit history, though sometimes they will only be able to see your payment history and total indebtedness and not the score. If your bank, for example, wants to review your business account they can ask a credit bureau for information on your financial health.
Obviously, it can be checked if you have applied for new credit, but a third party can also pull your credit report in connection with the valuation of an existing debt obligation. What does this mean? If you owe another company and they are trying to pledge that receivable as collateral on an accounts receivable loan, their lender has the right to check your credit.
Landlords, cell phone providers, and employers often check credit too. Landlords view a decent credit score as an indicator that you will pay your rent in full and on time. Cell phone providers often build the financing of a new cell phone into your contract, so your credit-worthiness matters to them. Employers will check your credit if you are applying for a job that involves handling money. You can often request that these be a soft pull of your credit report.
Insurance and utility companies check credit before approving a policy or opening a new account. If you have ever received a credit card or personal loan solicitation through the mail, it is because they checked your credit and want to lend to you. They were able to check it because it is a legitimate business need for them.
You can always ask the person requesting your credit information if they will pull it using a hard or soft pull, but as a general rule of thumb, if you had to give the lender permission to check your credit score, it will likely be reported as a hard pull.
What if there’s a hard pull of on my credit report that I didn’t authorize?
Your credit report displays hard pulls and everyone who has accessed your credit information. Before applying for a small business loan, it is a good idea to review your credit report. If you identify an error and can have it corrected before you apply, your score would rise, and you would receive better rates and terms.
If you find an incorrect hard pull on your credit report, you can dispute that error with the credit bureau. You can also call or write the creditor to have it removed. You should not ignore an unauthorized hard pull as it can be a sign of identity theft. Remember that hard pulls always need your permission.
Soft Pull of Credit Score
A soft pull does not appear on your credit report. It is the type of pull that is done by a credit card company when they send you a solicitation or by an employer when you have applied for a new job. A soft pull is typically a pull of your credit score that is initiated by the other party, not by you.
Another way of thinking of it is that if you apply for a loan, it will be a hard pull, but if an existing creditor just wants to check your current credit card balances, it will be a soft pull. The reasoning behind this is that a hard pull indicates that you are looking for money, whereas a soft pull may be necessary to meet a business need but does not mean that you need more capital.
Who typically does a soft pull of my credit score?
Landlords, employers, and existing creditors typically perform soft pulls of your credit score. A bank will sometimes perform a soft pull just to verify your identity if you are opening a new checking account.
Landlords do not always perform a soft pull. They will check your credit report, but typically it’s only a soft pull if they use a service. If you are actively working to improve or maintain your credit score, ask which type of pull their check will be and request a soft pull. The same goes for employers if they are performing a background check.
What about checking my own credit score?
Often, your credit score can change up to five times a year. Small business owners who are monitoring their credit may have signed up for a service, or they may check their credit by contacting the credit bureaus directly. By law, the credit bureaus must supply you with one free copy of your credit report a year.
The good news is that since monitoring your own credit is a part of good credit management credit bureaus do not lower your credit score because of self-monitoring.
It is to the advantage of every small business owner to educate themselves about the difference between hard and soft pulls and be aware of them when managing their credit.