If you’ve ever applied for credit, you must be aware of the concept of credit checks. When you apply for credit, lenders pull a credit check on you to assess your creditworthiness. There are normally two types of credit inquiries – a hard credit check and a soft credit check. But do they affect your credit rating?
Read on to find out more about credit checks and their impact on your credit score.
What is a soft credit check?
A soft credit check is an inquiry into your credit report initiated either by you or an organization running a background check. Financial institutions that offer pre-approval on credit also use soft credit checks to assess applicants.
Fortunately, a soft credit check does not leave a trail on your credit score. Your credit score helps lenders assess your creditworthiness based on your credit history and outstanding debt obligations.
Difference between a hard and soft credit check
When a lender or creditor requests an inquiry into your credit report through credit bureaus, it may get recorded on your file as part of your credit history. What impact this inquiry leaves behind depends on whether it was a hard or soft credit check. Here’s how they’re different:
Hard credit check: A hard credit check is an inquiry initiated into your credit report by a lender or creditor. Lenders, mortgage providers or credit card companies conduct this check to assess your past credit behaviour. Your credit report holds your credit history, details of defaults, your credit accounts, public record information such as CCJ or a decree, and details about your account provider. A hard credit check can leave a footprint on your report for a little over two years. It also slightly lowers your score, but only by a few points. However, you can improve your credit score by making regular repayments towards your debts.
Pro tip – Avoid applying for too many loans within a short span. Hard credit inquiries stay on your report for two years. Too many probes within a short period can make you look like a high-risk borrower.
Soft credit check: Unlike hard credit checks, a soft credit check can be initiated any time, not just when you apply for credit. Do your recall the credit card offers in your junk mail? Well, those offers are based on a soft credit check. Every time you request a copy of your report from a credit bureau or a potential employer runs a background check on you; a soft check inquiry is initiated. While all soft credit checks get recorded on your credit report, the information isn’t visible to everyone. A soft credit check isn’t linked to an application for new credit, so you can rest assured since this type of inquiry has no impact on your credit score. This inquiry is only meant for reference or pre-approval purposes and is thus, not disputable.
How long will an inquiry stay on your report?
Each hard credit inquiry into your report usually stays on it for about 2 years. This is accompanied by a slight drop in your credit score. A soft credit check, on the contrary, doesn’t count as a negative item in your credit score and is not visible to all inquirers. Credit scoring models do not factor in soft credit checks because they aren’t associated with a credit application.
Can credit inquiries be removed from my report?
If you spot a hard credit inquiry in your report for credit that you don’t recall applying for, it would be wise to investigate further. You can raise a dispute for hard inquiries that occur without your approval. It could be a sign of identity fraud wherein a person stole your identity to apply for credit. Here’s when a hard credit inquiry is disputable:
- Someone initiated the inquiry without your knowledge.
- You did not approve the inquiry.
- There were more inquiries than you expected.
- You felt pressured into approving the inquiry.
Tips for managing your credit inquiries better
Here are some steps that you can take to manage your credit inquiries better:
- Apply for credit only when you need it. If you apply simply to explore the options, you might end up adding unnecessary negative items in your report, lowering your score.
- Leave healthy gaps between credit applications – at least 30-45 days. If you want to shop for loan offers, try to do it in a short time frame.
- Practice checking your credit report regularly. If you spot an incorrect item or an unsolicited hard inquiry, raise a dispute and get it resolved as soon as possible.
8 ways to improve your credit score
You do have some control in this area. Here are 8 ways to help you improve your credit score:
- Get yourself registered on the electoral roll: If you haven’t enrolled yourself, you may face a tough time getting credit. You can either enrol yourself online or by post.
- Regularly check your credit report: A regular scrutiny of your credit report will make it easier for you to identify erroneous records. If you happen to spot one, you can get it rectified by reporting it to the respective credit bureau.
- Report fraudulent activity: If you spot an inquiry by a creditor that you did not apply with, raise a dispute with the credit reference agency to get your report updated. Someone may have stolen your identity and applied for credit.
- Make timely repayments: Paying your phone and electricity bills on time also counts towards improving your credit score. Making timely repayments will leave a positive impression on your report, proving your ability to handle finances responsibly. So, it is crucial to keep up with the loan’s repayments. Besides, your lender may take a legal course of action if you default. A County Court Judgment (CCJ) can severely impact your credit score, hampering your chances of securing credit in the future.
- Keep a tab on your joint accounts: If you have a joint account with your spouse, friend or family member, their credit rating may affect yours if they have a below-average score.
- Maintain a low debt-to-income ratio: Your credit report gives the lender a detailed account of your credit history. This includes any debt obligations that you’re tending to. Lenders may be apprehensive about lending to someone dealing with a lot of debt.
- Try not to move places too frequently: You may seem like a risky applicant move homes too frequently. Lenders feel more confident lending to people who’ve stayed at an address for a considerable period.
- Keep a low credit utilization ratio: The credit utilization ratio compares how much credit you use out of your available credit limit. For instance, if your credit limit is £5000 and you’ve used £2300, your utilization is 46%. Ideally, your credit utilization ratio should be 25% or lower.