Before I process an application for commercial credit, I am often asked whether I do a 'hard' credit pull or a 'soft' credit pull. We all know that a hard pull show as an inquiry on your credit report while a soft one does not, but it is commonly misunderstood why one is done over the other or vice versa.

What is a hard credit pull?

When you apply for a new credit card, mortgage, or other type of loan, the lender will do a hard pull on your credit. This means they will access your full credit report for the purpose of making a lending decision.

When a hard inquiry is submitted, your credit score will generally drop by a few points, though multiple hard inquiries in a short period of time may cause it to drop further. A hard inquiry will stay on your report for up to two years, though the impact will diminish over time. Without a hard inquiry, a lender will not be able to extend an offer of credit to you.

What is a soft credit pull?

A soft credit pull, or soft inquiry, does not affect your credit score. Your full credit report is not released in a soft inquiry, though some information is disclosed.

A soft inquiry may be made when:

• You check your own credit report
• You check for preapproval with a credit card or mortgage
• You apply for an apartment rental
• An insurance company does an account review

What's the difference between a hard pull and a soft pull?

A hard credit pull accesses your full credit report. The lender will have access to your full credit history, and the pull itself will be noted in your credit file for future lenders to observe. Meanwhile, a soft pull doesn't give the full picture -- but it also doesn't affect your credit. For the most part, you need to personally authorize a hard credit pull, but not much information is needed about you for a soft pull to be run.

How much do hard inquiries hurt your credit score?

A hard credit inquiry can decrease your credit score by up to five points, according to FICO, (FICO is an independent data analytics company and not a credit bureau) though it may less impact if you have good or excellent credit. And while a hard inquiry will remain on your credit report for up to two years, your score is usually only impacted for a year or less.

The type of inquiry matters. If you're rate shopping for a mortgage or loan, FICO will ignore credit inquires for 30 days prior to adjusting your score. If you're applying for a new credit card, however, it's best to avoid triggering multiple hard inquiries in a short period of time. Too many inquiries could suggest you are a risky borrower who is more likely to default. And multiple inquiries in a short period of time can lead to a lower score and applications being denied.

How can you reduce the impact of a hard inquiry?

First, know where your credit score stands. Federal law guarantees that you can check your credit reports for free every 12 months, and the three major credit bureaus upped that to once per week starting in 2020. Go to annualcreditreport.com to view your reports from each of the three credit bureaus. You can reduce the impact of hard inquiries by following these guidelines:

• Apply strategically. Space out your applications and make use of prequalification.
• Apply selectively. Calibrate your applications and credit score; there's a risk in applying for a card that requires excellent credit if you have a lower score. When possible, check to see if you prequalify for a card you're interested in.
• Practice good credit habits. Good credit habits go a long way in keeping your credit score healthy. Pay your bills on time and in full and monitor your credit.

In summary: Being educated about your credit and how the three main bureaus determine your credit score is imperative to efficiently run your business. The small amount of time it takes to monitor your credit and dispute anything that does not look correct is a small price to pay to ensure that you are able to obtain the best possible rate for your loan.

Until next month,

Tim