Understanding Soft Credit Checks vs. Hard Credit Checks

published on 24 June 2024

Have you ever been denied credit and wondered why? It could be because of a hard credit check. In today’s financial landscape, credit checks play a crucial role in various aspects of our lives, from securing loans to renting a flat. However, the difference between soft and hard credit checks can be confusing. This article aims to demystify these terms, explaining their differences, benefits, and impacts on your credit score.

What Are Credit Checks?

Credit checks are evaluations performed by financial institutions, employers, landlords, and other entities to assess your creditworthiness. These checks provide a snapshot of your financial behaviour, helping entities decide whether to extend credit, offer a job, or rent a property to you.

Soft Credit Checks

Definition: A soft credit check, also known as a soft search, occurs when a person or company checks your credit report as part of a background check. These checks are not linked to a specific application for credit and do not impact your credit score.

Common Scenarios for Soft Credit Checks

• Pre-approval for Credit Offers: Lenders perform soft checks to determine if you qualify for certain credit products without formally applying.
• Employment Background Checks: Employers may conduct soft checks to evaluate your financial responsibility.
• Personal Credit Inquiries: Checking your own credit report falls under soft checks, allowing you to monitor your credit health without any negative consequences.

Benefits of Soft Credit Checks

• No Impact on Credit Score: Soft inquiries do not affect your credit score, making them harmless to your financial standing.
• Rate Shopping: You can compare loan rates or credit card offers without worrying about damaging your credit.

Hard Credit Checks

Definition: A hard credit check, or hard inquiry, occurs when a lender or creditor reviews your credit report as part of their decision-making process. This typically happens when you apply for a loan, mortgage, credit card, or rental property.

Common Scenarios for Hard Credit Checks

• Credit Card Applications: Applying for a new credit card usually triggers a hard inquiry.
• Loan Applications: When seeking a mortgage, auto loan, or personal loan, a hard credit check is performed.
• Rental Applications: Landlords often conduct hard checks to assess your reliability as a tenant.
• Utility Company: When setting up utility services, the utility company might perform a hard credit check.

Impact on Credit Score

• Effect on Score: Hard inquiries can lower your credit score by a few points. This impact is usually temporary, lasting up to 12 months, though the inquiry remains on your report for up to two years.
• Higher Risk Perception: Multiple hard inquiries in a short period can signal higher risk to lenders, potentially lowering your score further.

Key Differences Between Soft and Hard Credit Checks

• Purpose and Usage: Soft checks are for background purposes and personal inquiries, while hard checks are for formal credit applications.
• Impact on Credit Scores: Soft checks have no impact, whereas hard checks can lower your score.
• Visibility on Credit Reports: Only you can see soft inquiries, while hard inquiries are visible to anyone reviewing your credit report.

Managing Credit Checks

Strategies to Minimise Negative Impacts

• Timing of Applications: Space out credit applications to avoid multiple hard inquiries within a short period.
• Rate Shopping: When shopping for loans, do so within a short timeframe (e.g., 14-45 days) to minimise the impact of multiple hard inquiries.

Best Practices

• Regular Monitoring: Check your credit score regularly to stay informed about your credit status and detect any inaccuracies.
• Understanding Your Credit File: Familiarise yourself with your credit profile before applying for new credit to make informed decisions.

Common Myths and Misconceptions

• Myth: All Credit Checks Hurt Your Score: Only hard inquiries can impact your score; soft inquiries do not.
• Myth: Checking Your Own Credit Report Will Lower Your Score: Personal credit inquiries are soft checks and have no effect on your score.
• Myth: Applying for Multiple Credit Cards at Once is Okay: Applying for multiple credit cards in a short period can make you appear as a higher risk to lenders and impact your credit score negatively.

Additional Resources

• Credit Bureaus: Experian, Equifax, TransUnion
• Free Credit Monitoring Services: Check out services like ClearScore and MoneySavingExpert’s Credit Club
• Further Reading: Explore guides on credit management strategies available online and through financial advisory services.

FAQs

1. What is a credit score? A numerical representation of your creditworthiness based on your credit history.
2. How often should I check my credit report? At least once a year to ensure accuracy and monitor for potential fraud.
3. Can I dispute incorrect information on my credit report? Yes, contact the credit bureau to rectify any inaccuracies.
4. How long do hard inquiries stay on your credit report? Hard inquiries stay on your credit report for up to two years.
5. Can soft inquiries lead to identity theft? No, soft inquiries do not provide enough information to be a threat of identity theft.

Understanding the differences between soft and hard credit checks is essential for managing your financial health. By knowing when each type of check occurs and how it affects your credit score, you can make informed decisions and maintain a strong credit profile.