Whenever you apply for credit it will require a credit check. When a credit search is made on your profile, it will either be a hard inquiry or a soft inquiry.
But what does this mean? Let’s look at the differences between hard credit inquiries and soft credit inquiries, and how they can affect your credit score.
A credit search, also referred to as a credit check, is when a business looks at information on your credit file to determine how trustworthy you are when it comes to money management and debt repayments.
These searches can either be "soft" or "hard".
Depending on the type of credit search, it might reveal a variety of details about your financial situation, including your income and debt, your history of repaying loans and paying bills, and whether you have joint accounts with others.
Any bankruptcies or pending court judgments against you will be listed on your credit report.
Companies use credit checks to determine whether they want to extend credit to you. A business files a request to a credit rating agency (CRA) to do a credit search. The three main credit reference agencies in the UK are Experian, TransUnion, and Equifax.
These CRAs keep track of your credit applications and payment histories, and they all use comparable standards to determine your score. Therefore, if you received a good credit score from one agency, the other agencies are likely to give you a similar rating.
It's important to know the difference between a hard and a soft credit check and how it impacts your credit report.
Hard inquiries happen when a lender does a complete credit report search.
Any company looking at your credit report will be able to tell that you have applied for credit because each hard check is recorded on your profile.
Your credit score might be negatively impacted if there are multiple hard credit inquiries in a short period - usually six months - which will make it harder for you to qualify for credit in the future.
When you apply for credit, some lenders will run a hard credit check to determine your creditworthiness. Keep in mind that mobile phone companies and utility companies can also do a hard credit search on your profile when you apply for their services.
A soft credit check is an initial review of your credit profile. Companies use these soft searches to determine how likely you are to be approved for credit, without doing a complete search.
Note that soft searches do not affect your credit score or any future credit applications as they are not visible to other companies or lenders.
No matter how many soft inquiries you have, only you can see them on your report.
When you compare credit cards, loans, and mortgages, your profile will also be soft searched, especially if you conduct pre-qualifications for loans or other credit products online.
Yes, hard inquiries affect your credit score. Companies may assume you are having financial difficulties or that you rely too heavily on loans if you apply for multiple credit products in a short time.
Because a hard credit check reveals that you have applied for credit, lenders may view you as a higher-risk customer.
Applying for too many credit products at once may result in your application being denied. Keep in mind that most hard credit inquiries remain on your credit record for 12 months.
The fewer credit applications you submit, the fewer hard searches will appear on your report.
However, you can increase the chances of being approved for credit if you only apply for a personal loan if you're eligible. You can determine this by doing a pre-qualification, triggering only a soft credit check, or making sure you qualify based on the lender's requirements.
No, hard credit searches can't be removed. However, most hard credit checks will disappear from your report after a year.
On the other hand, if you notice credit searches on your file that you are unfamiliar with, it might be an indication of identity theft or fraud.
If you fall victim to fraud, lenders must quickly repair any harm done to your credit report and score. You can also get assistance from the credit reference agency where you're listed as they assist victims of fraud.
If you do need to apply for credit, whether it's for a new loan, credit card, or mobile phone contract, spreading them out can help maintain your score.
A good guideline is to submit no more than two credit applications every few months, but keep in mind that different lenders will evaluate your credit score differently.
If you apply for a credit account and it lowers your credit score, there may be things you can do to fix it. Checking your credit score will give you a sense of how potential lenders may view you.
If you've ever applied for a loan, credit card, or mortgage, you've probably had a hard credit check done. Here are some companies that do hard inquiries:
Banks and credit providers
Letting agencies and landlords
Utility providers like gas, electricity, and water
Mobile phone providers
Depending on the type of application you do, these companies can do hard or soft credit checks when assessing your application.
There are a few factors that can affect your credit score in a negative way:
If you open new credit accounts frequently, it can lead to a temporary drop in your credit score. But if you do it too often it can take time to repair your credit.
If you use too much of your credit (getting too close to your credit limit) it can also lead to a drop in your score. Try not to max out your credit cards or use your entire overdraft at once as it might look like you rely on credit to make ends meet.
Making multiple credit applications at once can hurt your score, regardless of whether they are successful or not. This is because every hard search is recorded on your profile.
If you miss multiple payments or regularly miss a monthly account payment, lenders may record a default on your credit report. This can lower your score for up to six years.
If you borrow more than you can afford, it can not only hurt your credit but lead to a debt spiral. If you can't pay off your debt without taking on more debt, you can apply for a Debt Relief Order or an Individual Voluntary Arrangement (IVA).
Lenders may try and obtain a County Court Judgment (CCJ) against you or apply to make you bankrupt. This will significantly lower your credit score.
If you've never had credit you may also have a low credit score. This is because lenders want to see a good payment history to see that you can repay a loan on time. Luckily there are many ways you can build up your credit history.
It may be a sign of financial trouble if you apply for credit too often, especially in a short time. It can hurt your credit even more if you are turned down. If this happens, lenders may see you as a high-risk customer and you may struggle to get credit.
Therefore, it is always recommended to use an eligibility checker first before applying for a loan or credit card. It can also give you a better idea of the loan rates you may qualify for.
Yes. You can find out which businesses have run credit checks on you from your credit report. In reality, credit checks are helpful in many ways.
Looking at your credit report can help you spot any false information or even fraudulent applications that are done in your name. It's worth the time and effort to regularly check your report.
The best way to find out what banks and other lenders know about you is to check your credit report and score, which is normally free of charge. It's your legal right to do so and checking your credit report won't have any negative effect on your score.
No, you can't 'fail' a credit inquiry. With a soft credit search, you are not applying for anything, but rather looking at your chances of being approved for credit.