A hard credit check is essentially a review of your credit history by a lender or credit provider. This is done to ensure a customer’s creditworthiness before the lender provides them with a loan or credit product. These inquiries can affect your credit, so it’s important not to have too many hard credit checks on your credit report.
What Is A Hard Credit Check?
When you apply for a loan, your lender needs to see if you are a creditworthy candidate before they decide to approve your application. This decision is mostly based on whether your credit score is good or bad. If it’s good, you are considered trustworthy and based on your financial history, income, and a few other factors related to your money management, you do not represent a high risk for the lender. If your credit is poor, your lender cannot be sure based on your past financial history if you are going to make your payments on time.
While lenders need to check your credit before they sign a contract with you, other companies and individuals might also be interested in your credit report, including your prospective landlord, employer, a credit card company, or a phone carrier. Anytime you are about to make a long-term financial commitment, the other party needs to make sure that you will honor the contract and that you will be able to keep up with the payments.
These credit checks always appear on your credit report, but not all of them need your permission to be made, and not all of them will affect your credit score. You must approve a hard credit inquiry before it is done. A hard credit inquiry may negatively impact your credit score. These hard credit checks are conducted to determine whether you are creditworthy when you apply for a loan, and they’re also called hard credit inquiries or pulls.
What’s a Soft Credit Check? What Is the Difference?
As mentioned before, a hard check can hurt your credit score and lower your chances of getting a loan. Soft credit checks on the other hand, do not impact your credit score, although they do appear on your credit report.
For example, the law states you are entitled to one free credit report per year—or more, depending on some specific cases. Looking into your own credit history is not a hard but a soft credit check. It does not change your credit score in any way.
A Soft credit check also differs from a hard inquiry because you do not always need to give your approval for them to be performed. Your potential employer cannot do it without your permission, but other businesses could potentially have the right.
For example, if a credit card or an insurance company wants to send you an offer, they may look into your credit history to know which products might be suitable. Their credit check will not affect your score because it’s a pre-approved offer and not a specific application from you.
Also, certain companies can see all the hard credit inquiries on your report but not the soft inquiries, so you can basically have as many as you want. Other information these companies can see will also be limited. Only institutions where you apply for a financial product can access your full credit report.
Soft inquiries may happen while you are looking for the right lender, comparing your credit options, and checking if you are eligible for a specific loan or different interest rates. Unfamiliar inquiries on your credit report that you did not authorize are sometimes a red flag, but more often it’s a company conducting a soft inquiry and you may soon be receiving a credit offer of some sort. However, if you still think it looks suspicious, you can always check with the bureau and make sure your identity was not stolen.
What Do Lenders Actually Check?
If you have ever seen your credit report, then you know it contains five sections with five types of information about your credit history, as well as some details that are not finance-related. Your credit report consists of:
- Your name, current, and previous address (if it exists), birth date, etc.
- Your credit history: any potential debt you’ve had in the last seven years, missed payments, late payments, accounts, balances, etc.
- Legal matters such as bankruptcy or a tax lien.
- Any new loan you have applied for in the last two years.
- Soft credit checks, although they do not affect your FICO score.
Lenders that gain access to your credit report will be interested in the information that can reveal more about your debt management, late or missed payments, and anything that tells them how likely you are to pay off the loan by its due date.
Note that a lender can choose a few different scales for calculating your credit score, although the FICO score is the most common one. They may also opt for Transunion, Experian, or Equifax, or all of them. These are the standard bureaus that provide credit reports for individuals as well as financial institutions.
Your borrowing history may be a vital factor in the lender’s decision-making process. Not all lenders will consider only your credit score; other elements of your credit history, such as your debt-to-income ratio, can be as important.
To have your loan application approved, you must usually meet the basic criteria: the minimum credit score a lender determines and a 36% or lower debt-to-income ratio.
What Are the Most Common Hard and Soft Inquiries?
There are some common situations when hard and soft credit checks are likely to happen. A hard credit inquiry is performed if:
- You are applying for a plan at a phone company
- You are applying for a personal loan, a credit card, or mortgage
- You are applying to a utility company
On the other hand, soft inquiries happen:
- When you request your credit report
- When you use online tools to check your credit score
- A company checks your identity and looking at your credit report is a part of that process
When Does a Hard Credit Inquiry Show On Your Report?
A hard credit check will appear on your credit report as soon as it happens. However, you can take advantage of this fact by combining multiple hard credit inquiries into one. For this to happen, these inquiries need to be similar (such as mortgage-related), and they all need to be made within 30 days. In situations such as these, the hard credit inquiry will have a reduced effect on your credit score.
Note that an inquiry that you authorized cannot be removed from your credit report. However, if there has been an error, you can contact the bureau you got the report from and ask them to eliminate that particular credit check. An error can mean that the check happened by mistake or without your approval.
Can You Manage Credit Checks?
You can refuse to allow potential lenders to look into your credit history, as well as your prospective landlord or employer if you so desire, but even a hard inquiry will not negatively affect your credit score if you qualify for the loan you are planning to take out. However, there still may be a couple of things you can do to make sure there are not too many hard credit checks on your report.
- Take all the necessary steps to make sure your credit score is good and you have no outstanding debt or maxed out credit cards. Paying bills on time will also help.
- It is recommended that you apply for a loan only in case you have no other choice, and if you are sure you will be approved.
- Consider checking your credit report at least once a year to make sure there are no mistakes that could affect your future financial decisions.
- It is possible to avoid a credit check altogether, no credit check loans do exist. However, it is important to carefully review all terms and conditions before applying for one.
What If There’s an Error in Your Credit Report?
If you notice an error in your credit report, it’s best not to simply wait for it to expire. If you have noticed a hard credit check coming from a company that you have not received an offer from, or you do not recognize, it may be a warning sign of fraud, specifically identity theft.
Of course, it could also be an honest mistake. Whatever the reason, you should contact the credit reporting company as soon as possible, in person, or in writing, and dispute the error. Do not let it affect your credit report negatively and perhaps influence the lender’s decision about an important loan.
What Happens if Many Hard Inquiries are Conducted?
The hard inquiries from applying for too many loans in a short time period can negatively impact your credit score. Hard inquiries can also have a greater impact if you have a shorter credit history, and while each hard inquiry will only affect your score by a little, they can quickly add up over time—even if the result is not always negative.
Hard inquiries are an important aspect of applying for a wide variety of loans and other financial services, but they can negatively affect your credit score when used too often.
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