What is the main difference between "soft" and "hard" inquiries on a credit report?

The primary distinction between "soft" and "hard" inquiries lies in their impact on credit scores. Soft inquiries are typically checks that do not affect an individual's credit score. They can occur in various situations, such as when a person checks their own credit report, when a lender conducts a background check without the intent of granting credit, or during pre-approval processes. On the other hand, hard inquiries occur when a lender evaluates a person's credit report as part of the decision-making process for lending, such as when applying for a new loan or credit card. Each hard inquiry can cause a slight dip in the credit score because it suggests that the individual is seeking new credit, which could indicate a higher risk to lenders.

While the length of time that these inquiries remain on a credit report can vary, the crucial difference is the effect they have on credit scores, making the first option the correct answer. Soft inquiries are also not exclusive to new accounts, as they can occur in various contexts unrelated to opening a new line of credit, and hard inquiries do not guarantee loan approval, as they are just part of the overall credit evaluation process.