Why do lenders do hard pulls?

[Anonymous]

CGID, great topic and I've enjoyed reading all of the replies thus far!

I think another advantage of a HP for a creditor is that they can see thier own inquiry in the event of another application for credit in the next 2 years.  Whether it's a CC application or an attempt to get an apartment through a relatively small landlord, that HP will be visibile say a year and a half from now when the same applicant may apply again following a denial the first time around. 

[Whitebird]

"Regarding the first, I don't think you are suggesting that hard pulls are cheaper,"

What I said was, "Seemingly, creditors pay somewhat less for soft pulls," e.g., soft pulls are cheaper. 

"For the second, what your friend is likely getting at is that there are different kinds of soft pulls, some of which do give less data than a hard pull.  For example, one can do a soft pull solely for identity proofing -- to help establish that a person is who they say they are.  Such a soft pull would likely not give all the details about a person's accounts.  I can certainly imagine that such a soft pull would be cheaper than a hard pull."

Yes, I agree that that was what was being implied.   FWIW, I did not get the specific idea that soft pulls could never give the info that hard pulls could.  The discussion did not extend to that depth.  The point being made at the time was about the variations in what soft pulls vs hard pulls could show and that there were increasing costs with more data provided.  No, I cannot get more info re this.   It was a one-off, one-time remark.  What I asked that prompted that answer was "what's the difference in what hard vs soft pulls show." The answer I got was obviously as much as that person wished to reveal. 

The most important thing I want to emphasize is that the first paragraph of my response is intended to be way, way, way more important than the rest of my post in answering why creditors act as they do.  The data on costs for pulls was merely added as additional info that perhaps would be of interest, not implying that it was a significant factor.    Mispricing risk and resulting adverse selection for creditors by acting in their immediate short-term interests is overwhelmingly more costly to creditors than difference in costs of pulls--whatever they may or may not be.  That is my firm belief. 

[Anonymous]

Yup, BBS, that must be a key reason.  Good job.  And it falls clearly into the category of "how will this help me (the creditor) in a direct measurable way" as opposed to the vaguer "in the  greater scheme of things it's better if..." -- about which I am more skeptical as an engine of human motivation. 

It's curious that we've seen soft pulls for CLIs become so much more common.  There's still wide diversity of practice even here which I don't have a good explnation for.  We just may be in a volatile period where CC issuers are competing for ways to attract and keep customers -- one of them being the soft pull for a CLI.  It's coming with a (long-term) cost to the creditors, however -- the very reason you give above was a traditional reason to want CLI requests to be visible.  People soliciting substantial increases to their credit lines does involve risk, and in a world where all such requests involve a visible inquiry that gets documented.  Another risk with the easy soft-pull-for-CLI is the proliferation of giant lines of credit that are unrelated to real income or capacity to repay -- just read the signatures of people on this forum!  I am pretty sure the people here are not millionaires, but that's what you'd think from their big (total) lines of credit.

[Anonymous]

Hey Whitebird.  Thanks again.

Sorry if there was any confusion.  The sentence that jumped out at me was:

"What is overlooked in this discussion is an assumption that hard pulls and soft pulls yield the same information to the creditor."

I felt like you were getting at something really important.  I mean crucially important!  If a soft pull could not yield the same information as a hard pull, then that would totally explain why hard pulls were being used so much more.  Since you felt like this was being overlooked I was trying to affirm your concern and follow up with you on it. 

[Anonymous]

I used to believe that hard pulls yielded more information to the creditor than a soft pull, but started a thread about that a few months back and multiple people replied saying that the information attained by either pull is exactly the same.

[RobertEG]

An inquiry, be it a soft or hard pull, results in the same information being provided, with only one exception.

If the inquiry is to obtain a listing of consumers for which the creditor is making an unsolicted offer for credit, FCRA 604 explicitly states that the inquiry cannot provide any account specific information, and record of the inquriy cannot be included in any credit report made available to anyone other than the consumer (i.e., it must be coded as "soft").

[Whitebird]

Hello RobertEG (and all, including CGID)

"If the inquiry is to obtain a listing of consumers for which the creditor is making an unsolicted offer for credit, FCRA 604 explicitly states that the inquiry cannot provide any account specific information,"

RobertEG - If I'm understanding this correctly, that begs the question... In regards to those creditors who do make unsolicited offers of credit, assuming FCRA 604 applies, what information does the credit issuer get when it does the soft pull? The creditors have to get some information--otherwise why bother with a pull at all? What do they get if not "account-specific" information? FICO ranges/cutoffs perhaps?

CGID, I totally see your viewpoint. However, I respectfully disagree with your conclusions in this very specific situation we are describing--your position if I am reading it correctly--that a business would always benefit by taking actions to benefit the short-term, seemingly here-and-now profit, disregarding how it would affect long-term profits. The business model you describe whereby it's to the advantage of a business to think short- vs long-term--that would be the business model from which I understand the majority of businesses today would arguably benefit and yes, they undoubtedly do that. For them, it's not usually a choice of short- vs long-term.  Those businesses can have both.  For me, the businesses that heavily depend on the accuracy of FICO are very different and have a very different business model.  

If creditors would "game" the FICO system for the benefit of their own customers, such as for example, using soft pulls instead of hard at every opportunity--eventually no one would have good info.   Where would that leave us? FICOs models take here-and-now financial and credit data and project outcomes down the road 24 months.  If that's bad data, what then?

You yourself gave a good description of the sequellae of getting "easy pulls." As you say "Another risk with the easy soft-pull-for-CLI is the proliferation of giant lines of credit that are unrelated to real income or capacity to repay -- just read the signatures of people on this forum!"  Yes!  ITA!  Totally!   I believe that creditors and others dependent on FICO to make decisions have the business savvy to recognize the likely detrimental-to-all outcome of the scenario you describe and take steps to prevent this from happening.  Yes, that would mean not giving everyone soft pulls whenever/wherever they can to preserve the validity of the system for everyone.  There are many other ways competitors can compete short-term--interest rates, balance transfers, points, cash back, etc. 

I guess we've discussed everything except specific cost of inquiries--I cannot help further than the info I have already provided. I have to say that perhaps these costs depend on other factors--specifically the industry. Pulls are made for mortgages, cars, personal loans, LOC, CC and what else. I wonder if they all have the same cost?  In addition, I think the very large creditors, the household names, get a better deal vs small outfits because  of volume/industry plus perhaps a couple other factors such as paying for customized models to be developed (by FICO) based on their customers' specific demographics. Yes, a big upfront cost for them but then most likely individual pulls from that customized model that may cost only pennies. 

What I don't see happening is creditors using more soft vs hard pulls.  If the former benefits their near-term business as you believe it does, why are they not using more soft pulls?  Note:  I certainly don't have absolute data on number of hard vs soft pulls.  JMO. 

[Anonymous]

Hey WB!  You write:

What I don't see happening is creditors using more soft vs hard pulls.  If the former benefits their near-term business as you believe it does, why are they not using more soft pulls?

I don't know, WB, but I sense (perhaps wrongly) that the last several years we have been seeing just that with respect to CLIs,  A number of years ago (but not many) Citibank told me that the only way I could get a CLI was with a hard pull.  Now there are all kinds of ways to request soft pull CLIs at Citi.  Same with a number of other CCCs.  There's still far from uniform policy on it across the entire industry, but I sense that we have been seeing a drift from a time where (back in the day) if a customer initiated the CLI request it was very likely to be a hard pull -- to now where a soft pull for that request is much more common (than it had been).

This is why I used the word "proliferation" to describe the ease with which people acquire huge total credit limits with no rootedness in real income -- it's a thing that has become more common (I am guessing) as soft-pull CLIs have became more common.

It has a disturbing analogue to the multi-year period leading up to the financial meltdown of 2008.  The movie INSIDE JOB is a fascinating chronicle of that period -- and a look at how (in absence of govt regulation) businesses in an industry can be influenced by rewards of the moment rather than the clear good of the economy or even of the industry they are a part of.  There was no question that in the long run these companies were (and knew they were) engaging in behavior that would harm them -- and yet the need to compete with people willing to make those damaging short term decisions was too much.

Naturally I view it as a good thing that most applications for new accounts still result in a hard pull.  I was just curious to know whether there was any kind of regulatory guidance that might be leading lenders in that area (but no, as RobertEG observes).  My interest in Alliant SSL made me even more curious since here we had an actual softpull loan.  Once Alliant decides they can do that, why not something else?  And so on.

Interesting conversation.  Thanks all.

[Anonymous]

While I'm certainly happy it is not the case as I like to frequently request CLIs, it would probably be a smart move if all (or significantly more) CLI requests resulted in a HP.  Since utilization is already a bogus sector of scoring the way it currently works, at the very least if people had to sacrifice HPs for CLIs one of two things would happen... one, they'd carry more inquiries or two, they'd pass on CLI requests and have lower overall credit limits resulting in higher utilization.  Either way, scores would likely be slightly lower across the board and more indicative of potential risk, IMO.

Maybe a happy medium would be the best case.  Perhaps SP CLIs could be requested up until a certain point, be it a flat dollar amount or a conservative percentage gained (say 20%) where anything in excess of that determined amount would result in a HP.  Of course this would mean things like Amex 3X CLIs and such would always result in HPs which would bother some.  This would definitely keep a lot of card holders much more conservative in growing their limits as many of them would not want to take HPs all the time.  Where currently someone can grow a $5k Amex or Discover card to $20k-$35k in a year or so, using only SP's that $5k card would possibly only make it to $10k unless the card holder was willing to take HPs.