Credit checks are inquiries made by lenders and creditors into your credit profile. Lenders want to assess your creditworthiness by looking into your credit history.
Credit checks are of two types; soft and hard credit checks. Both of them are used for the same purpose of checking credit scores but with varying impacts on your credit profile.
Let’s dive in to know more details about credit checks.
What is a Credit Check?
A credit check or a credit inquiry is a process of looking at your credit report by a lender or a creditor. It is performed to assess your financial health.
A credit check does not always require your consent or approval. However, it happens when you apply for a new loan, credit card, or refinance your existing loans.
It means lenders and creditors must have a legitimate reason to inquire about your financial health through your credit report.
Lenders perform credit checks to assess borrowers’ ability to repay a loan.
How Do Credit Checks Work?
When you apply for a new loan, credit card, mortgage, or refinancing, you’ll permit the lender to look at your credit report.
Lenders will assess your creditworthiness by checking your credit score and credit report. Your credit score is the summary of your credit report that comprises several financial factors.
So, who can check your credit report?
Lenders and creditors can contact one or all three credit bureaus to evaluate your credit report.
- Banks and credit unions
- Credit card providers
- Housing societies
- Landlords and lenders
- Auto loan providers
Three credit bureaus Experian, Equifax, and TransUnion keep records of millions of American borrowers. These records are used by two credit analytical agencies FICO and VantageScore to compile credit scores of borrowers.
Lenders would typically assess one of these three bureaus to check your credit score and get a detailed report if necessary.
Depending on several factors, a credit check can be of two types; soft or hard credit check.
Soft Credit Checks
A soft credit check is a quick method to look at your credit profile by lenders. It does not offer detailed information about your credit history. However, it does offer sufficient information to lenders to take an initial decision.
A soft credit check is performed when:
- Lenders evaluate your mortgage preapproval
- Evaluating preapproval application for a line of credit
- Credit check by an employer
- You check your credit score
- Some payday lenders perform a soft check to make a lending decision
- Loan connection services may assess your eligibility for loans to connect you with a lender that fits your needs
A soft credit check does not harm your credit score. When lenders evaluate your credit history, they do not see any soft credit checks in the report.
Soft credit checks are only visible to you. These checks are useful for lenders and borrowers alike as they do not come with any downside risks.
Hard Credit Checks
A hard check occurs when lenders evaluate your credit history in detail. It is a formal inspection of your credit profile through your credit report.
Lenders initiate hard inquiries when they want to assess the creditworthiness of borrowers for the long term.
Hard credit checks are performed when you:
- Apply for a mortgage or home line of credit
- Apply for an auto loan
- Apply for a personal or commercial bank loan
- Refinance your loans
- Apply for a rental contract
A hard credit check appears on your credit history. It affects your credit score by up to five credit points as well.
If you apply for multiple loans of the same type, credit bureaus will consider them as one application and there will be only one hard inquiry on your credit report.
However, multiple loan applications of different types would count as multiple hard checks and it may affect your credit score adversely.
A soft credit check has no impact on your score and is only visible to you. A hard credit check can affect your score and is visible to lenders on your report.
Tips to Avoid Negative Effects of Credit Checks
Soft credit checks do not come with negative effects. A soft inquiry can be made when you check your credit score.
Hard credit inquiries may harm your credit score. They may also leave a negative impression on your potential lender that you are under financial stress and looking for a bailout desperately.
Here are a few quick tips for you to avoid the negative effects of credit checks.
- Check your credit score with all credit bureaus.
- Use your free credit report access which is available once every 12 months.
- Shop for similar kinds of loans within a span of 15-45 days to avoid multiple hard credit checks.
- Apply for corrections if you see any credit score disputes or different credit scores from different credit bureaus.
- Credit card providers can put a soft credit inquiry without your approval. You can limit them by contacting your credit bureau as well.
- Use the loan preapproval option whenever possible as it incurs only a soft check and allows you to preplan for a hard credit inquiry later.
- Spread or limit the number of hard inquiries by avoiding unnecessary loan applications.
Did you know?
Loanza’s free loan search has no impact on your credit score. It can actually help you protect your credit score by connecting you with a lender that will most likely fund your loan. This way, you avoid going from lender to lender that would show multiple checks on your file.