What is the difference between a soft inquiry and a hard inquiry?

The distinction between a soft inquiry and a hard inquiry is significant when it comes to credit reports and how they affect an individual's credit score. A soft inquiry occurs when a person or company checks a credit report without the intention of making a lending decision. This type of inquiry can take place, for instance, when an individual checks their own credit report, or when a lender conducts a background check as part of a pre-approval process for credit products. Soft inquiries do not impact the credit score, allowing individuals to monitor their credit health without any negative consequences. On the other hand, a hard inquiry, or hard pull, happens when a lender or financial institution requests a credit report to make a decision about extending credit. This typically occurs when an individual applies for a loan, credit card, or mortgage. A hard inquiry can cause a slight decrease in the credit score, usually by a few points, and it remains visible on the credit report for up to two years. Lenders use hard inquiries to evaluate creditworthiness, which means frequent hard inquiries in a short period may raise red flags for potential lenders, indicating financial distress. It is advisable to manage the frequency of hard inquiries to maintain a healthy credit score.