Last time, when we discussed the importance of checking and monitoring your CIBIL or credit score, many of you asked us the difference between hard and soft credit checks or inquiries. And how it can affect your credit score.
So, in this post, we’ll discuss hard and soft credit checks, understand their types, and learn how to manage them to maintain a healthy credit score.
So, let’s get started!
Estimated read time: 3 minutes and 57 seconds
Buckle up. Here we go!
What is a hard credit check?
A hard credit check, or a hard inquiry, occurs when a lender or financial institution assesses your credit report to make a lending decision.
When you apply for a new credit card, a loan, or any form of credit, the lender typically conducts a hard credit check. These checks are essential for the lender to evaluate your creditworthiness and determine the risk involved in lending money to you.
Types of hard credit check
1. Loan applications
Whether you’re applying for a personal loan, home loan, or auto loan, the lender will conduct a hard credit check to evaluate your creditworthiness.
2. Credit card applications
When you apply for a new credit card, the credit card issuer performs a hard credit check to assess your creditworthiness.
3. Rental applications
Some landlords and property management companies may perform a hard credit check when you apply for a rental property to gauge your financial responsibility.
Hard credit check’s impact on credit score
The effect of a hard credit check on your credit scores ultimately depends on your overall credit health. One or two hard credit checks can temporarily lower your credit score by a few points.
But multiple hard inquiries within a short time frame will have a greater impact on your scores. This happens because multiple hard inquiries within a short period could indicate that you’re actively seeking credit, which may raise concerns about your financial stability.
Hard credit checks generally stay on your credit reports for about two years but typically only affect your credit scores for one year.
Exceptions to the impact of a hard credit check on your credit score
When you’re searching for a new auto, mortgage or student loan, the multiple inquiries are generally counted as one inquiry for a given time period.
The time period may vary depending on the credit scoring model used, but it’s typically around 14. This allows you to check different lenders and find out the best loan terms for you.
All new auto, mortgage or student loan credit checks will show on your credit report; however, only one of the credit checks within a specified window of time will impact your credit score.
This exception rarely applies to other types of loans, such as credit cards. All inquiries will probably affect your credit score for those types of loans.
What is a soft credit check?
A soft credit check, or a soft inquiry, doesn’t impact your credit score like a hard credit check do. These checks are typically for informational purposes and do not involve a full review of your credit history.
Types of soft credit check
1. Personal credit checks
When you check your own credit score or access your credit report, it’s considered a soft credit check. This kind of monitoring is essential to keep track of your financial health.
2. Pre-Approved credit offers
When you receive pre-approved credit card offers, the issuer may have performed a soft credit check to see if you meet their initial criteria.
3. Employment verification
Some employers may conduct soft credit checks during the hiring process, mainly to assess your financial stability and responsibility.
4. Background checks
Soft credit checks are also used during background checks for various purposes, such as rental applications or insurance quotes.
Soft credit check’s impact on credit score
Soft credit checks do not affect your credit score at all. They are considered harmless and won’t be visible to lenders when they review your credit report.
How to manage your credit checks for a healthy credit score?
Now that we understand the difference between hard and soft credit checks. Let’s explore how to manage them effectively to maintain a strong credit score.
1. Limit hard inquiries
Be mindful of applying for multiple credit cards or loans within a short period. Each hard inquiry can slightly lower your credit score. Instead, research and choose the best options before applying.
2. Check for pre-approval
If you receive pre-approved credit card offers, check if they indicate that a soft credit check was conducted. These offers can be a good starting point without impacting your credit score.
3. Monitor your credit score regularly
Monitor your credit score regularly. Use soft credit checks to track your financial progress without worrying about negative impacts.
4. Dispute inaccurate information
If you spot any inaccuracies or unauthorized hard inquiries on your credit report, promptly dispute them with the credit bureau to have them corrected or removed.
5. Consolidate loan shopping
When looking for a loan, such as a car loan or home loan, try to complete all related applications within a short timeframe (14 days). Credit scoring models usually consider multiple inquiries for the same type of loan as a single inquiry.
Remember, while hard credit checks play a significant role in securing credit, soft credit checks offer a safe way to monitor your financial health without affecting your credit score.
By managing your credit checks prudently and focusing on responsible financial behaviour, you can maintain a strong credit score, opening doors to better credit opportunities in the future.
Remember to share these insights with your buddies. Until next time!
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