To make informed decisions about loan approvals, lenders initiate credit pulls which help analyze an individual's qualifications. It involves reviewing an individual's credit history, including their payment history and other financial information, to assess their creditworthiness.
A vital step in determining if an individual is deemed trustworthy for obtaining credit involves carefully inspecting their credit history. This entails closely scrutinizing factors such as their payment history along with other relevant financial particulars. This helps the lender evaluate an individual’s ability to repay the loan.
Why is a credit pull necessary?
A credit pull is necessary to evaluate an individual’s likelihood of paying back any debts or loans they are applying for. It also helps lenders and creditors get a better understanding of an individual's credit history and financial standing to make more informed decisions about lending money.
There are two types of credit checks: Soft pulls and Hard Pulls
A soft credit pull is a type of credit check in which an individual's credit information is requested. It does not affect the person's credit score. A soft credit pull can be used by lenders to verify an applicant’s identity or for a loan pre-qualification or rate check.
A hard credit pull is when a lender or creditor checks an individual's credit report to evaluate their creditworthiness when a customer is formally applying for a loan. This type of check can affect an individual's credit score, as too many inquiries in a short period of time can be seen as negative by potential lenders.
Additional differences between Hard and Soft credit pulls
1. A hard credit pull provides access to an individual's credit history from one or more of the three major consumer credit bureaus. This is for review and assessment purposes. Conversely, a soft credit pull does not leave any trace on your credit report, and it can also be used by you to check your own credit score without the risk of being penalized.
2. Hard credit pulls are conducted by lenders who want to assess an applicant’s creditworthiness prior to offering a loan or approving them for a line of credit. On the other hand, a soft credit pull occurs when a financial institution checks a consumer’s credit to provide them with pre-qualified offers.
3. While hard inquiries indicate that you've recently applied for credit and can potentially decrease your credit score, soft pulls do not have such consequences. This makes them useful tools to see where you stand without harming your credit health. Furthermore, some types of soft pulls may even be beneficial if they allow you to rate shop before you apply, and thus can result in lower interest rates or better terms.
4. Unlike a hard credit inquiry, which usually stays on your record for up to two years, a soft inquiry does not show up on your report at all.
Before allowing a credit pull, consider doing the following:
1. Research credit inquiries to understand their purpose and potential impact on your credit score.
2. Check your credit report for errors or discrepancies before initiating a credit inquiry.
3. For optimal decision making about selecting a suitable lender based on your financial situation it is important to consider and compare rates from multiple sources.
4. Determine if the cost of a credit inquiry is worth any potential benefit you may receive from it.
5. Make sure that the company inquiring about your credit is reputable and trustworthy.