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Hard and Soft Credit Checks Explained

Hard and Soft Credit Checks

Understanding your credit score and how it is affected by different types of credit checks can be confusing. However, knowing the difference between hard and soft credit checks is crucial for maintaining a healthy credit score. This article will break down what hard and soft credit checks are, how they impact your credit score, and when they are typically used.

Credit checks are evaluations performed by lenders or other entities to assess your financial behaviour and creditworthiness. They look at your credit report, which contains information about your credit accounts, payment history, and overall financial responsibility.

Hard vs. Soft Credit Checks

The terms “hard” and “soft” credit checks refer to the nature and impact of the enquiry made into your credit report. Let’s explore each type.

What Is a Soft Credit Check?

A soft credit check, or soft enquiry, occurs when someone checks your credit report as part of a background check. This type of enquiry does not affect your credit score and is only visible to you on your credit report.

When Are Soft Credit Checks Used?

Soft credit checks can happen without your explicit permission and are often used in various scenarios:

• Pre-approval Offers: Credit card issuers might perform a soft enquiry to determine if you qualify for pre-approved offers.
• Personal Credit Checks: When you check your own credit score, it’s considered a soft enquiry.
• Background Checks by Employers: Some employers conduct soft credit checks as part of the hiring process.

Soft credit checks are essentially harmless to your credit score and provide a way for entities to evaluate your financial behaviour without impacting your creditworthiness.

What Is a Hard Credit Check?

A hard credit check, or hard inquiry, occurs when a lender reviews your credit report as part of their decision-making process for lending you money. Unlike soft inquiries, hard checks can affect your credit score.

When Are Hard Credit Checks Used?

Hard credit checks require your explicit consent and usually happen in situations where you are applying for new credit:

• Loan Applications: When you apply for a mortgage, car loan, or personal loan, lenders perform a hard inquiry.
• Credit Card Applications: Applying for a new credit card triggers a hard credit check.

Hard enquiries can temporarily lower your credit score by a few points. The impact is generally minor, but multiple hard checks in a short period can signal to lenders that you are seeking a lot of credit, which might raise concerns about your financial stability.

How Do Hard and Soft Checks Affect Your Credit Score?

Impact of Soft Credit Checks
Soft credit checks do not impact your credit score. They are not visible to lenders reviewing your credit report for the purpose of extending credit. You can have an unlimited number of soft enquiries without worrying about your credit score being affected. Impact of Hard Credit Checks
Hard credit checks, on the other hand, can influence your credit score. Generally, a hard enquiry might lower your score by 5 to 10 points. The effect diminishes over time, typically within a year, and the enquiry itself will drop off your credit report after two years. While a single hard inquiry is unlikely to significantly impact your credit score, multiple hard inquiries in a short timeframe can be problematic. Lenders might interpret multiple inquiries as a sign of financial difficulty.

How to Manage Credit Checks

Tips for Minimising the Impact of Hard Inquiries

• Limit Credit Applications: Only apply for credit when necessary. If you’re shopping for the best rates on a loan, try to complete applications within a short period, typically 14 to 45 days, as credit scoring models often consider this as rate shopping and count it as a single inquiry.
• Monitor Your Credit: Regularly check your credit report to stay informed about any inquiries and ensure there are no unauthorised hard checks.
• Be Strategic: Before applying for new credit, ensure your credit score is in good shape to minimise the need for multiple applications.

How to Check Your Credit Report

Checking your credit report is a good practice to maintain your financial health. You can obtain a free credit report from a number of suppliers, which use the three major credit reference agencies: Equifax, Experian, and TransUnion. Reviewing your report can help you catch any inaccuracies or unauthorised inquiries.

How Your Credit Report Impacts You

Understanding the difference between hard and soft credit checks is crucial for managing your credit health. Soft searches provide a way to gauge creditworthiness without affecting your score, while hard searches are necessary for obtaining credit but can temporarily lower your score. By being strategic about when and how you apply for credit, you can maintain a strong credit profile and avoid unnecessary dips in your credit score. Stay informed, check your credit report regularly, and make informed decisions to protect your financial future.