What's the difference between a soft and hard credit check?

Question

I understand that hard credit checks negatively impact a person's credit score. Why would it work this way, because it's seen as a negative thing to be applying for credit cards too often? Even then this is not necessarily a bad thing if the intent is to determine how likely they are to pay something back.

If negatively impacting your credit score is the only difference, then why not just use a soft credit check? Is it that a hard one is more detailed and thorough?

For context, I heard of a credit card that if someone isn't eligible for it, they do a soft credit check instead and approve them for another version (where an initial deposit must be made).

Answer 1

Disclaimer: Note my answer is based on US FICO credit models, but my understanding is that Canada uses similar models, so I expect most of this answer will be relevant.

In theory, it would be better for you if all banks did an initial soft credit check first so they can provide rates based on your information. (I don't know why not all banks do this.) Once you are ready to apply for credit, that is when a hard pull is needed. If I had to guess, I suspect the reason banks must still do a hard pull at that point is a combination of: (maybe) receiving additional information, and perhaps even a contract with the credit bureaus requiring them too.

Here are some metrics I found via experimentation 5 years ago regarding how much hard inquiries impact your credit score. Perhaps those results would be slightly different in the newer scoring models, and Canada-centric models may differ too, but it wouldn't surprise me if the concepts and roll-offs are similar today.

Answer 2

The signalling of intent and depth of reporting are the biggest differences.

Soft pulls are initiated by marketers and others with an interest in assessing your value as a prospective customer. Soft pulls are being run against you all the time, usually ahead of your receipt of pre-approved credit cards and other junk. Since this is happening (somewhat) without your knowledge or consent, it makes little sense to count this against you.

Hard pulls are initiated by the individual. Their execution indicates specific interest in credit-based services-- you are actively shopping around. Doing this too much will count against you.

Is it that a hard one is more detailed and thorough?

Yes. The soft pulls done for sending pre-approvals do not detail your actual credit history; it's usually just generic information like name, address, zip code and estimated/tiered credit score of everyone in your area-- it's only enough to pre-screen prospective customers in bulk.

Answer 3

You have a few options if you are concerned about a potential hard inquiry and its impact on your credit score. First, before applying for any major loan, such as an auto loan, a mortgage, or even a student loan, inquire with the lender whether a hard or soft inquiry is required to secure the funds.

Keep your hard credit inquiries to a minimum as well. You don't want to damage your credit score by applying for too many credit cards or loans. Furthermore, overextending yourself in terms of credit can be detrimental to your financial situation.

To avoid credit card fraud, you should also cross-check the hard inquiries you initiated with those that appear on your credit report.