How does a “soft pull” affect your credit score, and your ability to participate in P2P marketplaces?

14 Jan

14/01/16

A ‘soft pull’ or ‘soft inquiry’ is when an institution, or indeed yourself, does a credit check on you without it affecting your credit score. If you were applying for a loan and the bank did a ‘hard pull’ on you, and you were subsequently denied the loan, this would stay on your permanent credit record.

A hard pull resulting in a failed application would likely lower your credit score, because if you already have debts owed and are making further loan applications, this would make you a less attractive applicant.

Many organisations can ask for a ‘soft pull’ on your credit record, including P2P lenders. A potential employer can ask your permission to do a superficial credit check on you. Financial institutions you already have an account or relationship with check your credit; and credit card companies that want to send you preapproved offers check your credit.

What kind of checks do P2P lending forums perform?

The level of scrutiny a marketplace lender will put a potential applicant under varies greatly depending on the loan provider. Some target the upper tier of borrowers, while others offer sub-prime loans to those with credit scores too low to allow them to qualify anywhere else.

Some hire bespoke credit database companies to do an in-depth background check on applicants, usually if they are the company CEO and it is a business loan; other, perhaps less discerning, lenders stick to the three main credit reporting bureaus, Equifax, Experian and TransUnion.

Avant is an example of a company which deliberately targets applicants with low credit scores, offering them the chance to “repair” their credit score with a history of prompt loan repayments. Naturally applying for a loan with Avant, the company assures consumers, will not affect their credit score.

FICO (Fair Isaac Corporation), the independent industry body which is responsible for pooling the scores of the three credit scores from Equifax, Experian and TransUnion, warns that loan companies promising quick-fix solutions to a credit score are making empty promises.

The company does warn applicants that the interest rate on the loan they take out will be more favourable if they have a good credit record. It uses this as incentive to borrow, in the hope of ‘saving money’ in the future:

“We’ll send notice of payment history to the major credit bureaus which may improve your credit score with timely payments. As your credit improves, you may be eligible for lower rates on subsequent loans through AvantCredit.” Note that the representative APR is a hefty 48.5%.

It is true though that timely reporting to credit bureaus of prompt repayments on a loan might in the long run make a borrower seem more trustworthy. But if you are only looking to improve your credit score, remember that much of your scoring comes from paying bills on time (about 35%) and how much outstanding debt you have. Factors like drawing on a range of different forms of credit (e.g. credit card and long-term loan) comprise around 10% of your score.

Social Selection at Social Finance

Social Finance inc. (SoFi) carefully selects its borrowers, assessing a range of financial and cultural factors to determine not only the applicant’s creditworthiness, but also effectively their social status. It asks questions about their education and their career experience, as well as monthly income vs expenses, and obviously their financial history.

SoFi likes to keep loans within the SoFi community, operating a subtle social streaming process. It offers cash rewards for successfully referring a friend. Previous loan applicants can share a referral link to let someone else refinance their student loan or take out a personal loan.

The platform also mentors newly graduated entrepreneurs through the SoFi Entrepeneur Program, and here some of the application questions are indicative of the parallel socio-cultural assessment. The company is asking itself, “Is this individual a long-term investment?”

Such questions include details like the name of school the applicant graduated from, and details on their employment such as “Are you a founder/ co-founder?” and “Are you working full-time?”.

In Conclusion

The question is how thoroughly the organisation manages its data, and if it sells it to a third party. Information in this industry is currency, and there is no guaranteeing the privacy of everything you disclose in an application.

Consider that, while the Federal Housing Association (FHA) says anyone with a credit score of 500 can apply for a mortgage loan, 97% go to those with credit scores of 620 or over. While a ‘soft pull’ will not affect your permanent credit score, there is no guarantee the information unearthed will in no way affect your application for a marketplace loan.

 

 

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