When customers shop and apply for financing, they kick off a review process with the bank or lender. There are actually two types of reviews – soft pulls and hard pulls – both of these “pull” the applicant’s credit history but serve two different functions. To better understand the difference, we’ve put together a breakdown of each credit pull and why they both matter.
Let’s start with the basics: what is a credit pull?
Also known in financing lingo as an ‘inquiry’, a credit pull is an action taken by banks or lenders to view a credit report and/or FICO score. Credit pulls are a huge part of the decision process to approve or deny a borrower. Pulling credit gives banks or lenders a sense of a customer’s “creditworthiness”, or likelihood of paying back a loan.
There are three credit bureaus that each have their own version of a credit report: Experian, Equifax, and TransUnion. So, depending on the reporting agency your lender uses, the results of a credit pull can vary (Roadrunner Financial uses Experian Auto 8).
Soft pull vs. Hard pull
There are a few reasons for a credit inquiry, and the soft pull accounts for most of them. That’s because there’s only one time that a hard credit pull is necessary, while many different soft pulls can occur.
Soft Credit Pulls
When are soft credit pulls used?
- A pre-approval, like when you receive those pre-approved credit card offers in the mail.
- Checking your own credit report – you’ll never ding your own score by keeping track of your financial info.
- Employer background checks – some employers check credit to see if a new hire is responsible with their finances (and responsible in general).
Effect on Credit
Soft pulls don’t impact your credit score, because they are not marked on your credit report. But, they’re still used to make credit decisions and rate offers to borrowers before they submit a credit application – that’s a pre-approval. Pre-approval is based on lenders finding low-risk prospective borrowers, and offering them certain rates with the hope of closing a deal with them.
Hard Credit Pulls
When are hard credit pulls used?
- When a lender pulls credit for a loan application.
That’s it. A hard pull is reserved for the big credit inquiry lenders make when they receive an application for a loan. When you submit your application, you’re agreeing to a hard credit pull by the lender. A hard pull is the one step towards a lender deciding to approve or deny a loan request – unless! – the lender has a pre-approval program.
Effect on Credit
Hard pulls are marked on your credit report, so they do impact your credit score. The full effect of a hard credit pull on credit score depends on the person – not everyone’s score is affected the same amount! But, for most, a hard credit inquiry takes about 5 points off a FICO score.
Depending on the score you’re starting with, this could impact future loan offers (i.e. if your score is already borderline, you could get bumped into a lower credit tier).
What’s good about pre-approval?
Pre-approval programs that use soft pulls allow qualified customers to get an estimated rate offer before going through with the application/hard pull. That means you can shop around for rates with soft pulls before committing. But, a hard pull is inevitable when it’s time to submit a credit application.
Is Powersports Different?
There’s an existing FICO rule to know: according to myFICO, “FICO Scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring.” This means only one hard pull for 30 days of shopping for these three types of loans.
Notice that the rule above doesn’t include shopping for powersports or outdoor power equipment! So your customer could get a new hard pull on their credit with each lender. That’s why soft pull programs, like the one at Roadrunner Financial, are especially valuable while shopping for powersports vehicles. When you know how to get your customer a good deal and keep their credit happy, they’ll notice and have the best buying experience!