Soft Vs. Hard Credit Check

Credit bureaus profit from collecting personal and financial information about you. They sell reports to banks and other creditors as well as to insurance firms and others who wish to check your credit worthiness. The bureaus also sell pre-screened data to marketers, and they charge you to receive copies of your own reports if you do not use the official free website, AnnualCreditReport.com. Credit checking is considered "soft" or "hard," depending on the purpose.

Definition

Credit checks occur when anyone, including you, checks your credit reports through the TransUnion, Experian or Equifax credit bureaus. Each bureau keeps and sells its own records, so a creditor may check one, two or all three reports. A credit inquiry is "hard" if it results from an application, the Lending Tree loan website explains. "Soft" checks result from marketer inquiries or reviewing your own reports.

Effects

Soft credit checks are harmless to your credit rating. Companies processing applications do not see them on your reports, and they are not included in credit score calculation. Hard inquiries lower your score, and lenders are less likely to extend credit to you if you have too many on your records. The MyFICO website explains that a single hard inquiry may not affect your score at all, but it can lower your score by up to five points depending on other items in your report. Six or more inquiries hurt your score significantly.

Considerations

You generate a number of hard credit inquiries if you go loan shopping for a low interest rate. For example, you might fill out multiple applications while looking for a cheap car loan or mortgage rate, and your credit bureau files show every one of those inquiries. The MyFICO website notes that shopping around does not hurt your credit rating significantly, because scoring formulas take this common practice into consideration. Several inquiries for the same loan type within a few weeks count as just one credit check when your score is calculated.

Reporting Time

Neither soft nor hard credit checks stay on your credit reports forever. The Equifax credit bureau explains that they automatically get erased within two years. The hard inquiries no longer damage your credit rating once they are gone. Check your credit reports yearly by obtaining free copies of your reports from AnnualCreditReport.com to make sure outdated credit checks no longer show up. The Federal Trade Commission website explains that you have a right to dispute mistakes, including outdated entries, with TransUnion, Experian and Equifax. They are legally obligated to remove disputed data if it is past the allowable reporting time.