Hard Credit Check vs. Soft Credit Check: What’s the Difference?

Have you applied for a small business loan? If so, you most likely have been told that your credit will be checked, and there might even be a “hard” credit inquiry. All lenders will check your credit score before qualifying you for a business loan. But you might now wonder, well, what’s the difference between a hard and a soft credit inquiry?

Let’s take a closer look at what credit inquiries are, and the difference between a hard credit check and a soft credit check.

What is a credit inquiry?

It is when an organization requests access to the information available on your personal or business credit report. This information helps them make a decision about your business and your creditworthiness. You can also request a copy of your own credit report to keep track of your credit history and manage any financial issues.

What is a soft credit check?

Also known as a soft inquiry, it provides organizations with basic information including your credit score. Keep in mind that this type of credit inquiry does not affect your credit score. That’s because soft checks are not a part of a specific application. The most common soft credit check applications are insurance, rental apartments, background checks for employment purposes, and utilities.

What is a hard credit check?

Also known as a hard inquiry, it provides organizations a detailed credit history on you and your business. All the information is shown on your credit report and yes, it usually decreases your credit score. If you have a lot of past credit checks and did not obtain any loans, it shows lenders that you are struggling to get the funding you need. It’s good to keep in mind that around 10% of your credit score is based on inquiries you or a lender makes into your credit report.

The most common hard credit check applications are for auto loans, credit cards, bank loans and mortgages.

How to recognize a hard credit check before authorizing it

It’s a good idea to find out if a third party wants to do a soft inquiry or a hard inquiry before giving them permission. When you receive a contract, read it thoroughly; because sometimes you provide consent to check your credit report without even realizing it.

Another piece of advice is to get a free copy of your credit report at least once a year, review it, and ensure that all the information on it is accurate. But if you do end up accidentally signing a contract that gives permission for a hard inquiry, you can contact one of the three credit bureaus directly and dispute it. Mistakes like this do happen. The inquiry in the contract could have been hidden in intentionally deceptive legal language. So be sure to pay close attention, so as not to lower your credit score.

Ultimately, before completing any loan application, find out what type of credit check is required. If it turns out to be a hard check, make sure you check your credit score with one of the credit bureaus and meet the lender’s requirements. At the same time, work on building your business credit score. This way you will have a greater chance of getting the funding you need to grow or expand your business.