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By now you’ve probably heard about how important your credit score is when it comes to applying for a mortgage and buying or selling a home. This three-digit number is assigned to you by Canada’s credit bureaus based on your history of borrowing and repaying money on time, including credit cards, personal loans, etc.
Credit checks happen when an organization or individual requests to see information stored in your credit file to see what type of borrower you are. But there are different types of credit checks, each with its own pros and cons. Take some time to learn more about the difference between soft and hard credit checks and how they affect your credit score.
What Are Hard Credit Checks?
When a lender checks your score after you’ve applied to borrow money for a new loan, credit card, line of credit, etc., that’s considered a hard credit check. This will appear on your credit report. Seeking out new credit means there’s always a potential for new debt which would lower your credit score slightly until you can show that you’re able to handle the payments and debt responsibly.
What Are Soft Credit Checks?
When you or a third party is reviewing your credit for non-lending purposes, that counts as a soft credit check. Whether this is you checking in on your own credit score, a company offering you a new product/service or a company requiring reverification of an existing account. According to TransUnion Canada, a soft credit check may also be triggered by applying to rent a home, applying for a job and applying for insurance. Most importantly, soft credit checks do NOT impact your credit score so be sure to check in on your score regularly to ensure you’re maintaining a good borrowing reputation.
How Hard Credit Checks Impact Your Credit Score
Hard credit checks will always require your permission before they can be carried out because it will reduce your score by a few points each time it’s necessary. If you have a short credit history (for example, if you’re a student or a newcomer to Canada), it could have an even bigger impact. A hard credit check every so often for the purposes of applying for a mortgage, line of credit or credit card is completely normal. Just be aware of how often you apply for financing and keep an eye on your score to ensure you’re not doing more damage than good.
How Soft Credit Checks Impact Your Credit Score
Soft credit checks have no impact on your credit score. They’re purely for informational reasons and not for the purpose of obtaining financing and assessing your risk as a borrower. These checks can occur without your permission because they have no impact on your credit score.
How Long Do Inquiries Stay On Your Credit Report?
Hard credit checks can stay on your credit report for 3 – 6 years but as long as you keep up with your payments, your score will most likely rebound within a few months.
How Many Hard Inquiries Are Too Many?
Too many credit checks can make you appear desperate because a hard credit check indicates that you’re actively looking to borrow money which can negatively impact your score. Don’t forget that hard credit checks can stay on your credit report for up to 6 years so avoid the “apply until you get approved” strategy as it will have a very big impact on your credit score. If you’re curious about your ability to borrow money or are looking for financing, make it a point to do a soft credit check to pull your current report and speak to a representative at your financial institution for guidance.
Are Soft Credit Checks Accurate?
Sometimes it can be difficult to trust the accuracy of third-party software when it comes to credit checks. While these third-party providers are not the credit bureau themselves, they work in conjunction with some of the main bureaus in Canada like TransUnion to provide a simple, transparent way to monitor your scores anytime you need to. This means the scores you’ll see are not estimates, but accurate and reliable information provided directly from the credit bureaus themselves.
What’s The Best Way To Minimize The Impact Of Hard Credit Checks On Your Credit Score?
The main takeaway is to not to have too many credit checks on your file at once. If you’re looking for a new car, credit card or mortgage, it’s best to make all of your applications within a few weeks so they show up as one set of applications rather than a series of many hard credit hits.
Minimize your risk of credit card rejection by only applying for cards you actually need and will likely be approved for instead of shopping around and applying for multiple in the hopes of getting one. Always check your credit score before applying for a new credit card so you can be sure your current score falls within the credit card company’s requirements.
Credit checks allow lenders (and you) to monitor your ability to manage debt and gauge your capacity to take on new loans and credit. Being aware of what credit checks are and how they impact your score, will help you be more mindful about pursuing financing and ensure you have the best possible chance of getting the money you need whenever you need it most. If you have more questions and would like to speak to a professional, you can reach out to our team to learn more about loans, financing and your ideal next steps.