Hard vs. Soft Credit Inquiries: How They Affect You and Your Applicants
January 31, 2019
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When you rent your property to a tenant, they agree to pay you a certain amount of money in exchange for access to a living or working space. Rent is an obligation to pay money owed and, in this way, is just debt in another context. Understanding a renter’s history of paying past debts can indicate whether they will be able to pay the debt they owe to you. The most comprehensive, effective way to obtain this information is of course a credit report. But before you first start screening tenants and analyzing credit reports, you must understand and determine the method you’ll use to acquire your prospective tenant’s credit history. There are two types of inquiries: hard inquiries and soft inquiries (also called “pulls”). Some industries use only hard pulls and others use only soft, but landlords have the option of using either one. Therefore, understanding the differences and potential benefits of each can help you make the best tenant screening decision for your business.
What are hard inquiries and how are they run?
When someone applies for credit of some kind, whether in the form of a mortgage, auto loan, or credit card, the lender obtains your credit report via a hard inquiry. Each of these hard inquiries is recorded on the credit report itself and typically has a negative impact on the subject’s credit score. After all, if you had a tenant that applied for fifteen personal loans last year, you may have some concerns with their ability to manage money.
In order to run a hard inquiry on an applicant, a lender, employer, bank, or landlord must first obtain the applicant’s express consent. Running a hard inquiry without the subject’s consent is illegal. The inquirer will then simply need to provide their screening service the applicant’s name, social security number, and current address.
How do hard inquiries affect applicants?
Hard inquiries have a direct, negative impact on an applicant’s credit score. While the severity of the effect is variable based on a number of factors, scores tend to drop a few points for each inquiry (typically no more than 5). This may not seem significant on its own, but if an applicant is applying for multiple items in a short time (other credit cards, loans, properties, etc.), these inquiries can add up. Hard pulls stay on a credit report for two years but typically only impact the score for about a year.
How do hard inquiries affect landlords?
If you choose to begin running hard inquiries on your applicants, you will need to handle highly sensitive information directly (name, SSN, address). Therefore, additional measures must be taken to ensure you are doing so responsibly. In order to verify that you are compliant with FCRA (Fair Credit Reporting Act) guidelines, an on-site inspection of your business must be completed. The inspection is quick (generally about 15 minutes), non-invasive, and completed by a third-party representative approved by the major credit bureaus.
The purpose of the inspection is to verify that you have a legitimate business operation and that you can adequately protect consumer credit data. Once your inspection has been completed and your business approved – the process typically takes a few weeks – you can begin pulling full credit reports. Inspections must be completed annually and cost anywhere from $50 to $100 depending on the service provider.
What are soft inquiries and how are they run?
A soft inquiry is never used as part of an application for new credit. Instead, it is typically used for things like employment, rental housing, and looking up your own credit information. In these cases, a soft inquiry requires consent of the applicant, but there is a bit of nuance here. The consent granted is for the inquirer to view the credit report. They are not giving their consent to have their report pulled directly for evaluation. I know this seems confusing, but you can think of it like telling someone they can go out and get your report (hard pull) vs. showing it to them yourself (soft pull).
Lenders and credit companies are, in many cases, actually permitted to run soft-inquiries without the consent of the subject. This is how they send things like pre-approved loan offers. But have no fear, there is no negative impact to this behavior (other than the avalanche of junk mail).
How do soft inquiries affect applicants?
Soft inquiries do not affect the subject’s credit score. In rental housing and employment, services that provide soft inquiries do so by asking the subject to run the reports with them directly instead of the landlord. Because they’re running their own report, it is automatically a soft inquiry. The report is then shared with the landlord or employer so that it can be viewed and analyzed. The landlord isn’t directly involved in gathering the necessary information in running the report, so, in turn, the tenant’s credit score won’t be affected.
How do soft inquiries affect landlords?
Utilizing a soft inquiry tenant screening service is fairly hands-off for landlords. Once enrolled with the service, the only information needed from your end is the tenant’s email. This allows the service to contact the prospective tenant and ask them to provide the information necessary to initiate the report. Once the report is finalized, it is sent to you, the landlord, for analysis – no need to worry about violating privacy and data storage acts or damaging your tenant’s credit.
Soft Inquiry vs. Hard Inquiry – What do you get?
As far as the information returned, hard inquiries and soft inquiries are identical. In fact, the FCRA does not in any way distinguish a hard pull from a soft pull – it is almost entirely an administrative concoction. In both cases, you will be provided the types of debt the applicant owes, the credit limit or loan amount of those debts, their current balance, and their history of payment. If you’re unfamiliar with these terms or how to interpret a credit report, do a bit of research before making a decision on a tenant (check out the linked article for some help).
Which Credit Inquiry is Best for You?
Let’s get this straight – soft inquiries don’t hurt the tenant, they don’t require an on-site inspection, and the information they provide is the same as a that of a hard inquiry. So why use hard inquiries at all? There is one notable benefit to going the route of the hard pull. Although you yourself must be screened first before you can screen others using a hard inquiry, it can save you time in the long run. After your approval, you’ll simply need your tenant’s name, SSN, and current address (and of course their permission) to run the check. You do not need to wait for your tenant to fill out a credit application or answer security questions; you can get the credit information you need right away.
But while hard inquiries offer some positive latitude in the screening process, they also leave you susceptible to an identity thief pulling the wool over your eyes. A soft inquiry requires additional security questions that help the bureaus determine that the person requesting their report is who they say they are. This added assurance, coupled with ease of setup and no negative effects to the applicant’s score, makes the decision of hard inquiries vs. soft inquiries an easy one: soft inquiries are the way to go.
So, before running your first online screening report on a tenant, make sure you check with the service you’ve chosen to understand what type of inquiry they’ll use. If their answer is a hard pull, you may want to consider trying something else.
Here’s a quick recap of what we’ve covered:
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