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How Applying for a Loan Can Ruin Your Credit Score

The difference between a hard inquiry and a soft pull on your credit report can mean a huge change in your interest rate

Credit scores are like spouses…you don’t miss them until they’re gone!

In all of personal finance, there may be no other topic more important and more misunderstood than your credit score. Having a great credit score can open up a world of cheap financing for a home, car or just about anything.

Destroying your credit score means being locked in a cycle of high interest rates and poverty.

You might even be ruining your credit score and not even know it. Most people don’t know that applying for a credit card can hurt your FICO score and drive up the interest rate on loans.

Not all types of loan applications are alike though. There’s an important difference between a hard inquiry and a soft inquiry and it could just help you save thousands on interest when shopping around for a loan.

Use this guide about loan applications and the difference between hard inquiries and soft pulls to get the best deal on your next loan.

What is a Credit Inquiry?

Any time you apply for a loan, whether it’s a new credit card, mortgage or auto loan, the lender is going to check your credit report. Don’t believe the lenders that offer no credit check loans. Those are either payday loans with fees that equal 500% interest or just plain scams.

By giving the lender your social security number and signing the loan application, you are giving your permission to allow them to check your credit report and credit score.

These credit report checks are called ‘inquiries’ and go on your credit report for everyone to see. Each time you apply for a loan, an inquiry is reported and it makes it look like you’re scrambling for money.

Not only does it look bad to lenders if they see you are asking everyone and their brother for a loan but it actually decreases your credit score. Even if you don’t take the loan, the inquiry is counted in the ‘new credit’ category which accounts for 10% of your credit score. The type of application, whether it’s for a mortgage, personal loan or a credit card, may also hit your credit score in the ‘Types of Credit Used’ category.

how does applying for credit hurt your credit score

Those credit inquiries can stay on your report for up to two years even if you didn’t get the loan. Just a few applications for loans can ruin your credit score and make it so you have to pay higher interest rates on any new credit.

What is a Hard Inquiry?

But remember, there are different types of credit inquiries. A hard inquiry is made on certain loan applications and on any loan when you agree to the terms. The lender will run one final credit check to make sure your FICO score or credit report didn’t change from when you filled out the application.

This hard inquiry is the one that stays on your credit report and hits your score. It goes on your report immediately and can make it harder to get any other loans or can drive up the interest rate other lenders offer.

How is a Soft Inquiry Different from a Hard Inquiry on Your Credit Report?

A soft inquiry is different from a hard inquiry when you apply for a loan. Some personal loans and other lenders will do a soft pull on your credit report when you fill out an application. This is like a quick check on your report to get your score.

A soft inquiry doesn’t go on your credit report so nobody sees that you filled out an application and your credit score doesn’t decrease.

Soft Inquiries happen when:

  • Using a credit monitoring service to check your credit score
  • Applying for a personal loan but before you have accepted the loan
  • During a background check for a new job
  • Opening new account for public services like water and electric
  • When lenders screen for potential customers for credit card offers

Yes, a lender might do a soft inquiry on your credit report without you even knowing it. This usually happens when you sign up for another service and accepted terms that allow the business to send you ‘offers’ on products or services. It’s the reason you get credit card offers in the mail.

These soft pulls on your credit don’t hurt your credit score though so it’s no big deal.

If you do apply for a personal loan or for another type of credit where the lender does a soft pull, they will offer you loan terms based on that quick check. If you accept those loan terms, that’s when they will go back and do a hard inquiry on your credit to make sure nothing has changed.

How to Get the Best Deal on a Loan

Knowing the difference between a soft inquiry and a hard inquiry will help you get the best deal on loans without hurting your credit score. It’s always important to ask the lender if they will be doing a hard inquiry or a soft pull when filling out an application.

If lenders only do a soft inquiry, as with most personal loan applications, then you can apply to as many places as you want to see who offers the lowest interest rate. I’ve built a table of some of the best personal loan sites below.

Peer to Peer Lending SiteP2P Borrower FeesMinimum Credit ScoreLoan RatesNotes
Personal Loans
Click to Check Your Rate
5%5809.95% to 36.0%Three options including P2P Loans, Bank Loans and Personal Loans.
BadCreditLoans
Click to Check Your Rate
No Fees520Vary by stateNo fees and lowest credit requirements with p2p lenders.
Payoff
Click to Check Your Rate
2% to 5%6606% to 23%Specializes in loans to payoff credit cards. Low origination fee and no hidden fees or charges.
Upstart
Click to Check Your Rate
0% to 8%6205.67% to 35.99%Best for graduates and no credit peer loans.
SoFi Loans
Click to Check Your Rate
No FeesN/A but probably around 680 FICO5.99% to 16.49% (fixed rates)
5.74% to 14.6% (variable rates)
Low student loan refinancing rates.
Lending Club
Click to Check Your Rate
1% to 5%6405.95% to 32%Best combination of low fees and low rates.

There are times when a hard inquiry will not hurt your score immediately. If you are applying for a mortgage or auto loan, you can get hard inquiries that will usually not affect your score for 30 days.

The problem is that all those hard inquiries will start to decrease your score after a couple of weeks to a month. If you don’t get any of the loans for which you applied, it is going to make it impossible to get another loan at a good interest rate. All those inquiries will have decreased your credit score to the point of no return.

Already messed up your credit score or just want to increase your score for a better rate? Try these three credit score tricks before applying for a loan.

It can be a little confusing but knowing the difference between a hard inquiry and a soft inquiry can help save you thousands of dollars on loans. Make sure you know how loan applications affect your credit score and what’s on your credit report. Get the facts and take control of your financial future!

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