You can see the following explaine. It's my understanding. Is it right?
"it" using thing
"that" using thing also, but it's far from us and we don't hold it.
we use "it" as pronoun.
that ==used to indicate a person, thing, idea, state, event, time as pointed out or present, mentioned before
it == used to represent a person, thing, animal understood, previously mentioned, or about to be mentioned whose gender is unknown