A good personal credit score can make a difference with some lenders when you apply for a small business loan. And while building a good personal credit score requires that you apply for and use credit, the associated credit check that follows every credit application can actually hurt your score. If this sounds confusing or maybe even a little contradictory, it might help to understand the difference between what’s call a “hard” inquiry and a “soft” inquiry so you know what can pull down your score and what won’t before anyone checks your credit.
A “Hard” Inquiry
A hard inquiry is sometimes called a hard pull. Normally when a lender talks about checking your credit report he or she calls it “pulling” your credit—hence the terms hard or soft pull. Typically a hard pull is associated with an application for credit. For example, if you apply for a credit card, an auto loan, or a home mortgage and the lender checks your credit to make a lending decision, it’s considered a hard pull and can reduce your credit score for every hard inquiry.
This drop in your credit score happens whether or not the lender ultimately offers you the credit, so it doesn’t make a lot of sense to randomly apply for several credit cards (or other credit) over a short period of time. That could appear to the credit bureaus, or a potential lender, like you are desperate for credit and can’t qualify. What’s more, that hard inquiry can stay on your credit report for a couple of years—although it only reduces your score one time.
Fortunately, good credit practices like regularly and consistently paying your bills on time will increase your score over time. Nevertheless, it makes a lot of sense to limit the number of hard inquiries you have on your credit report each year.
With that said, the credit bureaus are aware that many consumers shop interest rates when purchasing a car or a home, so several hard inquiries during a short period of time (think two or three weeks) for an auto loan or home mortgage won’t reflect multiple dings to your credit report.
A “Soft” Inquiry
A soft inquiry, or soft pull, is different than a hard pull in that it doesn’t reduce your credit score and sometimes even happens without your knowledge. If you’ve ever received a “pre-approved” credit card application in the mail or had your credit checked in conjunction with a job application, they’ve done a soft pull.
Similarly, when you check your own credit score, it is considered the same as a soft pull and should not impact your score.
How Does Knowing This Help Me?
Knowing how credit inquiries impact your credit score can help you make decisions about where, and when, to apply for a loan. It’s appropriate to ask your lender what type of credit inquiry they’ll be making to evaluate your credit. If the lender makes a hard inquiry, you can make the decision about whether to make the application or not—particularly if you’re unsure about the loan or just shopping around to see what’s available. Multiple inquiries for something like a home mortgage or an auto loan are usually treated as only one pull instead of several.
Before you apply for a loan, it’s always a good idea to know what your credit score looks like ahead of time to avoid making a loan application where the odds aren’t in your favor to get the loan. Knowing how that loan application will impact your credit, and potentially your next loan application, makes it possible to take more control over your credit profile and make better-informed decisions—this applies to either a business loan or a consumer loan.