Soft vs Hard Credit Checks: What You Need to Know

You are already familiar with credit checks and how creditors use them to assess your creditworthiness. Also, you may know that each time you get credit checked, your credit score could be negatively affected. But did you know there are two types of credit check and one of them doesn’t necessarily impact your credit score?

If not, you are not alone. Below we will try to give you a general overview of the two different types of credit check and what the difference is between them.

To start with, you need to know there are two types of credit checks: a “soft” inquiry and a “hard” inquiry. And this is what you need to know about each of them:

What Is a Soft Credit Inquiry?

Soft inquiries are normally done for an employment background check, when you check your own credit, or sometimes when rate shopping for loans. Soft checks don’t negatively affect credit scores, even if done often, and they can even happen without you knowing about them.

Employers, lenders and insurance providers might view a credit report to get an idea of whether you manage your finances responsibly.

Sometimes soft checks are used by companies that send out pre-approved financial offers by mail. Soft credit inquiries may show up on your credit report but, as mentioned, they don’t affect your credit score. They will stay on your credit reports for 12 to 24 months, depending on the type of inquiry.

You can review your own credit report without worrying that it will affect your credit score. You can order your credit report for free once a year from the two credit bureaus, and we have a great blog post if you need help reviewing it. However, this free annual credit report does not show credit scores, only credit history. Having said that, you can obtain your credit score for free from several online service providers.

Normally soft credit checks would show up on you own credit report and you may see wording like “inquiries that do not affect your credit rating” as well as the name of the requester and the date of the inquiry.

Some uses of a soft credit check include:

Being pre-qualified for several types of loans;
Receiving pre-screened credit card offers;
Checking your credit score regularly may help you keep track of it;
Landlords can use soft inquiries to help determine which applicants meet the criteria to rent their apartment.

What Is a Hard Credit Inquiry?

A hard credit inquiry normally happens when you apply for credit such as a credit card, mortgage, or car loan. Creditors “pull” your credit information from one or both credit bureaus when doing a hard credit inquiry.

In Canada, the credit reporting bureaus are Equifax and TransUnion. These bureaus track much of your financial activity, including:

Credit card balances
Loan balances
Your loan repayment history
Number and type of credit accounts
Bankruptcy, consumer proposal, and other public record filings

When you think of all the data breaches that have happened in the past few years (including some at the credit bureaus), it may feel uncomfortable to know that the bureaus are constantly tracking your activity. However, for now no one has come up with a better system to make sure that creditors can get an accurate picture of an applicant’s financial situation.

Some of the entities that credit bureaus can legally send your credit information to may include:

Employers
Lenders
Volunteer groups
Government agencies

Landlords
Banks and credit unions
Payment processors
Debt buyers and collectors

Retail stores
Utility providers
Insurance companies
Casinos that extend credit

You should know that all hard inquiries will show up in your credit report and can impact your credit score depending upon the type of inquiry and the time frame of the inquiries. These inquiries may stay on your credit report for up to 36 months.

Multiple inquiries can affect credit scores because they can indicate to lenders that a consumer is repeatedly trying to apply for new credit. This, in turn, can indicate that they might be having financial issues and are relying heavily on credit and loan accounts.

How to avoid hard credit checks

We should keep in mind that having some credit and loan accounts is perfectly normal and can even improve a credit score, if managed properly. However, you should carefully consider if you need new credit before applying for an additional loan or account. As an example, you may want to think twice about applying for a department store credit card just for a discount on a purchase, knowing this additional inquiry could impact your credit score.

It is also a good idea to ask which type of credit check a company will run before agreeing to the inquiry. If the answer is a hard credit pull, you may want to find out if there’s a way to avoid that.

To summarize, here are a few tips about credit inquiries:

Check your own credit frequently and check for errors
Apply for loans sporadically and thoughtfully
Focus on behaviors that may help improve your score

Soft credit checks are becoming more common, and it may be difficult to reach your financial goals without the help of loans and credit. However, you can reduce the number of hard inquiries on your report by being proactive about achieving a good credit score. A strong score will make it easier to qualify for new credit and it can also save you money by lowering the interest you have to pay.

You will find lots of helpful information and resources on our website about credit scores, which you can access here. We encourage you to make use of this information and work systematically to improve your credit score.

Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.

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