What is a credit check?

 Credit checks, also known as enquiries are when lenders look at your credit reports to learn about your credit history and behaviour. Your credit report is a collation of data about your financial situation and creditworthiness; if you’ve paid back loans in the past, if you’ve paid on time and how much debt you currently have. Lenders look at this to assess the level of risk you pose to them if they lend money to you. Risk is represented by a lower credit score, meaning a higher possibility of defaulting on a loan or not paying back. The higher your credit score, the lower your risk is to lenders as your credit report will show that you make payments on time. 

 

Credit checks can also be conducted by other entities, for example, a potential employer or debt collection agencies. Most credit checks can stay on your credit report for 12 months, depending on the type. There are two types of credit checks; hard and soft. 

 

What is a hard credit check?

A hard credit check/enquiry is a request made by a potential lender to view your full credit report in order to decide if you are granted a loan or credit. These types of credit check cause a small short-lived decrease in your credit score. This inquiry stays on your credit score for two years. 

 

You will know when you are undergoing a hard credit check as lenders/creditors need to ask for your consent and authorization to pull your credit report. These types of credit checks are conducted when you apply for a loan (mortgage, auto, student, personal etc.) when you’re applying for a line of credit or a credit card, and if you’re requesting a credit limit increase. A hard credit check helps lenders assess whether you are eligible to be granted the loan or credit, along with looking at your debt-to-income ratio. 

 

What is a soft credit check?

A soft credit check is when you make an inquiry into your own credit report of if a company looks at your credit report without pulling it. The main difference between a soft and hard credit check is that a soft credit check doesn’t affect your credit score. It’s still visible on your credit report, but it doesn’t decrease your credit score. It is primarily used for a preapproval without actually applying for a loan. A few other examples of when a soft inquiry occurs are; when a potential employer looks at your credit, when you check your own credit report, credit card preapproval offers, and applying for preapproval for a loan.

 

What to do before an inquiry

Before you apply for any loan or a line of credit, ask the lender whether the credit check needed for approval will be a hard or soft inquiry. This will help you preemptively determine the effect on your credit score. Try keeping hard enquiries to a minimum as it could severely affect your score. However, some credit rating agencies can view multiple hard checks as “rate shopping” which could be grouped into one single hard credit check. 

 

The best way to prepare for loan and credit applications is to make sure your credit score can handle the short-term decrease once a hard credit check is done. Soft checks can be done by yourself to keep track of your own credit report and can be useful to help you prepare too.