Am I eligible to refinance my student loans?

Soft Credit vs. Hard Credit: The Real Difference

Whether you’re trying to get a loan, a credit card, or a cell phone, your credit profile is at the center of attention. It’s even common for a potential employer to review your credit. There are two types of credit inquiries that may be done: a hard credit inquiry or a soft credit inquiry. It’s important to understand the difference and how each may impact your FICO® score (the most common credit score used by creditors and lenders).

In General: Soft Credit vs Hard Credit

A soft credit inquiry (also known as a "soft pull") is a review of your credit that is performed by an employer, or an inquiry by a credit card company before it sends you an offer (you know all of those offers you receive in the mail). It also includes credit reviews that you have initiated─like when you check your free credit report once per year. You can also check out sites such as Credit Karma and Credit Sesame which are free scoring options to review your FAKO scores .Essentially, a soft inquiry is when your credit history is being reviewed, but you haven’t requested credit or a loan.

A hard credit inquiry is typically conducted in response to situations such as applying for an auto loan, personal loan, credit card, mortgage, housing rental, and certain student loans (such as Direct PLUS Loans, and private student loans). This happens when you have requested that a creditor or lender loan you money or accept your promise to pay (like when you promise to pay rent).

What’s the difference?

A soft credit inquiry will not impact your credit score. It’s common for credit card companies to purchase your data from the credit reporting companies to determine if you qualify for their offers. And think of how unfair it would be if you were "dinged" every time you looked into your own credit, just to make sure everything on your report was accurate.

A hard credit inquiry may impact your credit score, especially if you’re still working on establishing your credit history. For a number of people, there is not likely to be an impact to their overall score. For some, the hit could be around 5 points off their FICO® score; especially if the score is lower to begin with. This seems to plague college students and recent graduates because of the limited number of accounts and brief credit history in their profile. It’s best to exercise caution when applying for credit and try not to exceed six inquiries in a twelve month period. Why six? This number sends a signal that you may be a high risk to creditors since individuals who exceed six inquiries are 8 times more prone to file for bankruptcy than people who have no inquiries.

When it comes to hard credit inquiries, here are four critical tips to keep in mind:

  1. Hard credit pulls cannot be done legally without your authorization. If you are applying for a loan or line of credit, or if you are attempting to secure housing (including an apartment or house rental), you must give permission for your credit to be pulled.

  2. Credit inquiries may stay on your credit report for up to 24 months. But, only the first year of the credit inquiries impact your credit scores.

  3. If you are reviewing a copy of your credit report and find unauthorized inquiries, you should contact the credit reporting companies and file a dispute. This could indicate fraudulent activity so make sure you are vigilant. Follow up! Look into the viability of adding a security freeze on your credit report. A consumer report security freeze limits a consumer reporting company from releasing a credit report or any information from the report without authorization from the consumer.

  4. It is important to know how ‘rate shopping’ works. FICO® considers all similar inquiries made within a 14-45-day window as a single inquiry. This window is dependent upon the version of the FICO scoring formula used to calculate your FICO score. his applies to mortgages, applying for housing such as an apartment or home rental as well as auto loans and even student loans. Outside of this ‘rate shopping’ exception, each time a hard credit inquiry occurs, it could cost you a few points on your score.

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Am I eligible to refinance my student loans?