Is a Preapproval a Hard Inquiry?
Demystify credit inquiries. Discover how different checks affect your credit score and the key moment your financial standing is truly assessed.
Preapproval is a common step for individuals seeking new credit, such as a loan or credit card. Understanding how preapprovals work, particularly concerning credit inquiries, helps clarify their effect on financial health.
Understanding Credit Inquiries
Credit inquiries are records on a credit report indicating a party’s request to view an individual’s credit information. They are categorized into two types: soft inquiries and hard inquiries, which have different implications for a credit score.
Soft inquiries, also known as soft pulls, occur when a person or company checks credit as part of a background check or to offer pre-screened credit offers. Examples include checking your own credit score, receiving pre-qualified credit card offers, or an employer conducting a background check. Soft inquiries do not impact a credit score.
Conversely, hard inquiries, also called hard pulls, happen when a financial institution assesses creditworthiness for a lending decision. These occur when an individual applies for new credit, such as a mortgage, car loan, or credit card. Hard inquiries generally require consumer authorization. They can result in a temporary, slight dip in a credit score and remain on a credit report for up to two years.
The Nature of Preapprovals
A preapproval represents an initial assessment of an individual’s creditworthiness based on limited information. This process allows potential borrowers to understand the amount of credit they might qualify for before committing to a formal application. For instance, a credit card issuer may review basic financial profiles to determine eligibility for a specific card.
Preapprovals generally involve a soft inquiry. This means that when a lender checks credit for a preapproval, it typically does not negatively affect the individual’s credit score. The soft inquiry allows the lender to gauge risk without creating a formal record that could impact future credit decisions.
While many preapprovals use soft inquiries, some types, like certain mortgage preapprovals, might involve a hard inquiry. It is important to confirm with the lender what type of inquiry will be performed. Regardless of the inquiry type, a preapproval itself does not guarantee final loan approval; it merely indicates a strong likelihood of approval if a full application is submitted.
When a Hard Inquiry Occurs
A hard inquiry occurs when an individual proceeds from a preapproval stage to a formal application for a credit product. This is when a lender conducts a comprehensive review of the applicant’s credit history to make a final lending decision. For example, after receiving a preapproval for a credit card, submitting the full application will usually trigger a hard inquiry.
During a formal application, lenders often require detailed financial information beyond what was provided for preapproval. This can include verified income, employment history, asset statements, and a Social Security number to pull a complete credit report. This thorough review is necessary for the lender to assess the full risk associated with extending credit.
The hard inquiry associated with a formal application can cause a small, temporary reduction in a credit score. While this impact is minor, multiple hard inquiries in a short period could signal higher risk to lenders, especially for credit cards or personal loans. For rate shopping on loans like mortgages or auto loans, however, multiple inquiries within a specific timeframe, typically 14 to 45 days, are often treated as a single inquiry by credit scoring models to mitigate the impact.