When you apply for a loan, lenders will run an affordability check. A credit score perusal is part of it. When they check your credit report, they leave search footprints – which could be either soft or hard – that get recorded on your credit report, maintained by credit reference agencies. Both types of inquiries are different, and so are their impacts on your credit report and your ability to borrow money down the track.
A credit check, also known as a credit search, is an attempt by a lender to look at your credit information to understand your financial behaviour when you formally put in a loan application. An assessment of your credit file is paramount as it determines how risky a borrower you are and how likely you are to commit a default this time. The greater the risk, the higher the interest rates, but sometimes the loan application is turned down.
It is worth checking your credit report to see that you will not be refused a loan on the grounds that your score is below the minimum requirement that your lender has set. Be informed that checking your own credit report, regardless of the number of times you do it, will not lower your credit score, as it does not leave any visible footprints.
What is a soft credit check?
Lenders run both types of checks. Soft credit checks are made when they look at certain information on your credit report, such as your name, address and other personal details. The aim of soft checks is to decide how likely your application can be approved without conducting a full examination of your credit report.
Soft searches do not hurt your credit score, although they are recorded on your credit file. Other lenders cannot see these searches.
When are soft searches made?
- When you check your score on your own.
- When you apply for a loan, a mortgage, or a credit card through a broker, they run soft searches to take stock of your credit profile.
- When a company checks your credit report as part of a hiring process for certain roles.
- When insurance companies check your credit report to assess risk.
What is a hard credit check?
Hard credit checks are hard credit inquiries that lenders make when you formally apply for a loan. Even if you apply for a loan through the agency of a broker, lenders will make hard searches in order to evaluate your past financial history carefully.
Not only do these inquiries get recorded on your credit report, but they are also visible to other lenders. Multiple hard inquiries on your credit report will severely damage your credit rating. Too many hard inquiries within a short period of time will reduce your chances of qualifying for a loan.
Why do hard credit checks affect your credit score?
Too many hard credit checks within a short space of time call your credibility into question. This insinuates that you are in financial trouble or that you rely too much on borrowing because you often run out of cash. Hard credit inquiries reveal that you applied for credit in the past, so they, if abundant, might signal that you are a borrower with a high default risk.
Because you took out a loan in the past, it cannot be concluded that you are a borrower with a high default risk or that you are a subprime borrower. You are often refused a loan when you show desperation in getting money. Submitting too many applications at once is dangerous for your credit score. This generally results in rejection.
Sometimes, your abysmal credit rating also causes a turndown because it proves that you missed payments or made defaults in the past. If your credit score is not extremely poor, you can still qualify for a loan with bad credit. Hard searches remain on your credit report for two years, but they impact your credit score for up to a year.
Key differences between hard and soft credit checks
| Aspects | Soft inquiries | Hard inquiries |
| Purpose | Informational only (self-check, preapproval and background check) | Formal evaluation of your eligibility for a loan or a credit card |
| Impact on your credit score | No impact | Each inquiry pulls at least 5 points |
| Visibility | Not visible to others | Visible to all lenders |
| How long they stay | For 2 years | For 2 years, but the impact lasts only for a year |
Is there a possibility of avoiding hard checks?
There are lenders who claim that they provide loans with a soft credit check, but the fact is that no loans can be provided without a hard credit check. If you apply for a loan, hard credit inquires will be made and will be recorded on your credit report. In order to minimise the impact of credit inquiries on your credit score, you should reduce the number of applications.
If you want to ensure that you are eligible for a loan, you can seek preapproval letters from lenders. Bear in mind that prequalifying letters are not offered for small emergency loans such as text loans and the same-day loans.
Tips to protect your credit score
Here are the tips that can help you to protect your credit score:
- Keep checking your credit report regularly. Make sure that your credit score is not damaged due to erroneous information.
- Limit loan applications. Borrow money only when you need it, and you are confident about your repaying capacity.
- Use preapproval letters for large loans to avoid rejections. They do not affect your credit score.
- Compare loan rates before formally applying for a loan. This will help you pick a lender whose interest rates are affordable.
The final word
A soft credit check does not pull your credit score, but a hard credit check does. Each hard inquiry pulls 5 points from your credit score. Try avoiding multiple applications within a short space of time. Consider prequalifying offers when you want to know your eligibility for a loan.
Jessica Rodz is the Senior Content Writer at Cashfacts. She has a long career in the field of content writing and editing. Jessica has the expertise in the UK lending marketplace where she has worked with 7 different lending organisations and acquired many responsibilities from preparing loan deals and writing blogs for their websites.
At Cashfacts, Jessica is managing a team of experienced loan experts and doing a major contribution in guiding the loan seekers via well-researched blogs. She has done graduation in Business (Finance) and now currently doing research papers on the UK financial sector.
