A Soft vs Hard Credit Check in Canada: What You Need to Know
Hey, Canucks! Did you know the subtle difference between a soft vs hard credit check is crucial if you want a good credit score? That’s because the way someone accesses your credit file can actually lower your score. Yikes! You need to watch out for that because your credit score is your passport to better interest rates, lower premiums, and maybe even your dream job.
It informs financial institutions how well you handle credit, which is another term for a loan you take out using other people’s money. A better credit history translates to a higher credit score. Credit inquiries, commonly called credit checks, come in two forms: Soft and Hard. Both will have a different impact on your credit score. Let’s explore the world of soft vs hard credit checks.
A Soft vs hard credit check in Canada
Canada’s financial system is governed by a set of strict regulations which ensures the safety and security of consumers. In terms of a soft vs hard credit check, the system is standardized and is performed by the two major bureaus in Canada.
A credit check can either be soft or hard, depending on the purpose of the inquiry. Because a soft vs hard credit check is performed for different reasons, one has zero impact on your score while the other could have a siginificant impact. Let’s take a look at the effect of soft vs hard credit checks, who does them, why, and when.
The truth about soft vs hard credit checks
When you apply for a new loan with a financial institution or private money lender, it can affect your credit score. A hard pull or ‘hard credit check’ is when a lender makes a credit inquiry because you applied for something like a personal loan, mortgage, credit card, etc. You started the process when you submitted your application and consented to a credit check.
When that happens, the lender requests information from a recognized credit bureau in Canada. The credit bureau shares data with the person or the financial institution after ensuring their credibility. In Canada, the credit bureaus are Equifax and TransUnion.
However, you can always check your credit file to see which financial institution or lender has checked your creditworthiness. Usually, credit inquiries remain on your credit report for up to two years. Of course, a lot of banks and apps let you check your credit score for free, but they are not reporting agencies.
What can trigger a hard credit check?
A hard credit check takes place if you have specifically applied for something that’s as small as a credit card or as big as a home mortgage. In this case, the lender will assess your credit history and will accordingly make the decision of approving or rejecting your application.
As mentioned before, they will require your consent before proceeding with a hard credit check. Of course, mistakes happen. That is why it is always a good idea to check your credit score for mistakes. There shouldn’t be any random hard credit checks on your profile that you did not consent to.
Does a hard credit check hurt your credit score?
When the lender conducts a hard credit check, it will almost always have some sort of impact on your credit score. People with very good credit will likely see only a few points come off, and their credit score will rebound quickly. Those will lower scores may see more points come off and their score could take a little longer to recover.
If you notice a significant decline in your credit score, it most likely has to do with how many hard credit checks you’ve had within a certain period of time. A hard credit check will be recorded as an Inquiry on your credit report and will stay there for up to 3 years.
If you apply for multiple loans or credit products in a shorter period of time, it can have a very negative impact on your credit score. Lenders consider it a red flag that indicates you may be experiencing financial distress and desperate for credit. Because it’s a red flag for potential trouble, it lowers your credit score.
When do hard credit checks happen?
You can expect to receive hard credit checks when applying for a mortgage, a car loan, a credit card, a student loan, a personal loan, or a line of credit. Even just requesting an increase to your credit limit on a credit card will trigger a hard check. Why? It is because you want to access other people’s money for your own purposes. The lender wants to evaluate you and how likely you are to pay back the loan on time.
What’s a soft credit check?
A soft credit check impacts your life in a lot of ways but it does not impact your credit score. Soft credit checks let lenders and other interested parties analyze your credit too but for different reasons.
Unlike hard credit checks, soft checks are not used to calculate your credit score by Equifax or TransUnion. This means your credit score will remain unchanged when a lender performs a soft credit check because you did not apply for lending or credit.
For example, a soft credit check is what happens when you check your own score for free via applications like Borrowell, ClearScore, or your bank. A soft check can help you prequalify for a specific type of loan or a line of credit. When you actually apply for that product, you will need to submit to a hard credit check.
Preapproved loan & credit card offers
Ever wonder why you get junk mail from some lenders and credit card companies? You are suddenly pre-approved for something? It makes a lot more sense now. A soft credit check might be the answer. These checks are signals to lenders, rental companies, landlords, banks, and even potential employers. They might like your profile and want your business.
Do soft credit checks appear on your credit file for others to see?
Yes. A soft credit check is visible on your file, but it does not affect your credit score or scare off other lenders. Furthermore, a lender can do these checks without asking for your consent or permission. As Hardbacon has told you before, your credit score can affect your premiums for insurance policies.
When you get hired for a new job, your employer could make a soft inquiry to evaluate your credit history too. The same principle applies to renting a place to live. Your landlord can do a soft credit check, called a rental credit check, to see if you can handle the rent payment and how reliable you are to pay it as agreed.
How much do hard credit checks impact your credit score?
Not all hard credit checks affect everyone the same. A hard credit check could cost one person up to five points. For others, a hard credit check may lower their credit score up to ten points or more. It is never a one-size-fits-all situation.
The impact of a hard credit check depends on how many you have in a short period of time, and how strong or weak your credit score is to begin with. If you have a strong credit score, the impact is negligible, and won’t affect your creditworthiness. In most cases, the credit score rebounds to where it was as soon as the person makes their next scheduled debt payment on time
Lots of hard credit checks in a short period of time hurt everyone. But they hurt more and take longer to recover from the weaker your score is to begin with. Your credit report is a living document; it is constantly changing and updating based on your borrowing behaviour. There are ways to build it up. Time can be on your side.
Who should you contact if a hard credit check is done without your consent?
There can be times when you never gave your consent for a hard credit check but still, you see a reduction in your credit score. Undoubtedly, this can be annoying and frustrating. In case you observe any issues with your report, you should immediately reach out to the credit bureaus and request them to remove the hard checks from your profile. Can dispute misinformation on your credit report through Equifax as well as through TransUnion.
Furthermore, if you encounter any inquiries that were not made by you, or are suspicious regarding any theft or fraud, then you may file a complaint with the Financial Consumer Agency of Canada (FCAC).
You can use an app like Borrowell to check your credit score for free as many times as you want without harming your credit score.[Offer productType=”OtherProduct” api_id=”6511dc04a4ba41238225b316″]
Is there any way to minimize the effects of hard credit checks?
You can improve your credit score. You can also protect what you have by minimizing the effect of hard credit checks. Here are a couple of strategies that can help reduce the impact on your score:
Avoid applying for new loans at the same time
A single hard credit check will have a lesser impact on your score than multiple hard credit checks. If you want to reduce the impact of hard credit checks, your top priority will be to not apply for several credit products or loans in a short period of time. The logic is simple. If you’ve applied for many credit cards within a short period, for example, lenders do more hard credit checks. The result? It can cause a significant drop in your score.
However, this does not apply when it is a mortgage or if you are car shopping. Applying to multiple mortgage lenders or shopping for a car at different dealerships will each only register as one check. Let’s look into that.
Shop for similar types of loans within a certain time window
While applying for different credit applications is not advised, shopping around for car loans and mortgages within a 14 to 45-day window won’t impact your score. Credit agencies and financial institutions understand that a customer needs to explore and compare different service providers before applying for a loan.
That’s why, no matter how many similar applications you’ve submitted within 45 days, all the hard credit checks by lenders will be counted as one. For exmaple, Equifax considers hard credit checks for a specific application type as one, provided you’ve submitted them within a certain window, generally between 2 and 6 weeks (14-45 days), based on the type of credit scoring framework being used.
Review your credit report often
Reviewing your credit report often helps you keep track of soft vs hard credit checks made by lenders and their impact on your credit score. Further, you’ll also pick up on any signs of identity theft or fraudulent transactions made on your behalf. What frequency is best? Probably every month so you can spot any fraudulent activity.
Who is responsible for pulling a soft vs hard credit check?
Hard credit checks are done by lenders when you apply for a financial product. Think banks, lenders, credit card companies, etc. Soft credit checks are generally performed by lenders, landlords, government authorities, creditors, insurance companies, employers, cell phone companies, etc., for reasons other than lending.
A soft vs hard credit check: putting it all together
While soft credit pulls don’t impact your score at all, hard credit pulls may affect your score to some extent. Though a single hard pull can negligibly lower your score, multiple hard pulls can exert pressure on your credit report. That’s where you need to be thoughtful when applying for different types of loans or mortgages. Also, there’s no need to give consent for soft credit checks, while you must provide consent to lenders for hard credit pulls.
Many people like to check their personal credit score to assess their creditworthiness. Luckily, you can check it as many times as you want without worrying about its impact on your score. Remember, it’s considered a soft check. Besides, you can follow a couple of measures to ensure that your credit score is impacted to a minimum or negligible extent. Some of the measures include reviewing your credit score, keeping an eye on errors or frauds, taking advantage of rate shopping, and not applying for too many new loans at the same time.
After all, your credit score is vital, and lenders will look at it before approving any of your loan applications. So, ensure to have at least a decent score and a good credit history to access better credit offers. And don’t let hard credit inquiries haunt you! Remember, there are many factors that impact your creditworthiness, such as missing due dates for repaying loans, that can damage your credit score.
FAQs about a soft vs hard credit check in Canada
No, checking your credit score does not lower it. This is known as a soft credit check, also called u0022soft inquiryu0022 or u0022soft pull,u0022 which doesn’t affect your credit score. Lenders or creditors use u0022hard inquiriesu0022 when they’re deciding whether to approve your application for a loan or credit card, which can slightly lower your score.
In Canada, you can check your credit score by requesting a free credit report once a year from one of the two major credit bureaus, Equifax and TransUnion, Or you can check your credit score as many times as you want for free through apps like Borrowell and ClearScore. Some banks and credit unions also offer free credit score checks to their customers.
There are many ways to check your credit score for free. The quickest and easiest is through third-party services like Borrowell, ClearScore, and Credit Karma. You are also entitled to a free copy of your credit report once a year from each of the two main credit bureaus, Equifax and TransUnion.
Yes and no. The credit bureaus need a legitimate reason, known as a permissible purpose before they allow someone to look at your credit report. The definition of a valid reason varies based on where you live and is usually explained by your provincial Consumer Reporting Act. In most cases, lenders are legally required to get your explicit consent for a hard credit check (typically in writing) when you apply for credit like a mortgage, credit card, car loan, etc. But they can do a soft credit check without your consent for things like seeing if you pre-qualify for a special offer, or track down delinquent borrowers they are unable to make contact with. Other interested parties, like potential landlords, employers and insurance companies can also do soft credit checks without your consent.
As a general rule, lenders do not conduct credit checks when you renew your mortgage. However, if you wish to negotiate different terms or switch to a new lender, a credit check may be required.
Yes, Klarna performs a credit check. However, it’s a soft credit check which does not affect your credit score.
Yes, PayBright performs a hard credit check, which means it can impact your credit score. This is typically done when assessing your creditworthiness for a loan or financing plan.