The Ultimate Guide to Hard Credit Checks in Canada

Table of Contents
[ Show ]

    Have you ever wondered why lenders suddenly want to know everything about your financial history when you apply for credit? It all boils down to one thing – a hard credit check. In the world of Canadian credit, understanding the ins and outs of hard credit checks is essential. In this ultimate guide, we will deep dive into the world of hard credit checks, explaining what they are, why they matter, and how they can affect your financial future.

    Understanding Credit Checks

    What is a Credit Check?

    Before we dive into the details of hard credit checks, let’s start by understanding what a credit check actually is. Simply put, a credit check is a process used by lenders, landlords, and even employers to assess your creditworthiness. It allows them to obtain insights into your financial behavior, including your repayment history, outstanding debts, and any public records related to your finances.

    By reviewing your credit report, which is generated through a credit check, lenders can determine the level of risk associated with lending to you. Similarly, landlords may perform rental credit checks to assess whether you are likely to pay rent on time, and employers may use credit checks to evaluate your financial responsibility and trustworthiness.

    Difference between Hard and Soft Credit Checks

    Now that we know what a credit check is, it’s important to understand the difference between hard and soft credit checks. A soft credit check, also known as an inquiry, is a credit check that does not impact your credit score. It is often used when you check your own credit score or when a lender pre-approves you for a loan.

    Soft credit checks are beneficial because they allow individuals to monitor their own credit health without any negative consequences. They provide a snapshot of your creditworthiness without leaving a mark on your credit history. Additionally, when lenders pre-approve you for a loan, they perform a soft credit check to assess your eligibility without affecting your credit score.

    On the other hand, a hard credit check, also known as a hard inquiry, is a credit check that can affect your credit score. It occurs when you apply for credit, such as a mortgage, car loan, or if you are getting a new credit card. Lenders perform hard credit checks to assess your creditworthiness and determine the risk involved in lending to you.

    Hard credit checks are more comprehensive and detailed compared to soft credit checks. They involve a thorough review of your credit history, including your payment history, outstanding debts, and any negative marks such as bankruptcies or foreclosures. Each hard credit check leaves a mark on your credit report, which can potentially lower your credit score.

    It’s important to be mindful of the frequency of hard credit checks as multiple inquiries within a short period of time can indicate a higher level of risk to lenders. This can potentially have a negative impact on your credit score. Luckily, there are free ways to check your credit score in Canada that do not affect your credit score.

    Credit Building by KOHO
    Credit Building by KOHO
    Take out a line of credit, pay it off on time and build your credit history. We'll be with you every step of the way.

    Only $10/month for 6 months

    Common Types of Credit Checks
    Student LoanHard
    Car LoanHard
    Credit CardHard
    Personal LoanHard
    Prequalification for a Credit CardSoft
    Job ApplicationsSoft
    Insurance ApplicationSoft
    Credit Card CheckSoft

    Why Lenders Perform a Credit Check

    Credit checks play a crucial role in financial decision-making. When lenders review your credit report, they gain valuable insights into your financial behavior and determine whether you are a responsible borrower. This helps them evaluate the risk of lending money to you and assists in determining the terms and conditions of the loan.

    In addition to lenders, landlords also rely on credit checks to assess potential tenants. By reviewing a tenant’s credit history, landlords can gauge their ability to pay rent on time and manage their financial obligations.

    For example, let’s say you’re applying for a mortgage to buy your dream home. The lender will request a credit check to assess your creditworthiness. They will analyze your credit history, including your payment history, outstanding debts, and any previous bankruptcies or foreclosures. Based on this information, they will determine whether to approve your mortgage application and what interest rate to offer you. A positive credit history with a high credit score can help you secure a lower interest rate, potentially saving you thousands of dollars over the life of your loan.

    Similarly, landlords rely on credit checks to minimize the risk of renting to tenants who may default on their rent payments. By reviewing a tenant’s credit report, they can assess their financial stability and likelihood of being able to afford the rent. This helps landlords make informed decisions about who to rent their property to, ensuring a steady income stream and minimizing the chances of eviction.

    Neo Secured Credit
    Neo Secured Credit
    Annual Fee:
    None with Neo Standard plan
    Purchase Interest Rate:
    Between 19.99%-29.99%
    Special Features:
    No annual feeGuaranteed approvalNo credit check
    Get up to 15% cash back on your first purchase at a Neo partner, plus a $25 Welcome Bonus when you apply through Hardbacon.

    Secured credit card

    Impact of Hard Credit Checks on Your Credit Score

    Now, you might be wondering, “How does a hard credit check impact my credit score?” It’s a valid concern, as your credit score plays a significant role in your financial well-being. Each hard credit check can cause your credit score to take a small hit, usually around 5 to 10 points.

    While a single hard credit check may not have a significant impact, multiple inquiries within a short period of time can raise red flags for lenders. It may signal that you are actively seeking credit and potentially taking on more debt, increasing the risk of default. Therefore, it’s important to be mindful of how many hard inquiries you have on your credit report.

    For instance, let’s say you’re planning to buy a car and want to finance it through a loan. You decide to shop around for the best interest rates and terms, so you apply for financing at multiple lenders. Each lender will perform a hard credit check, which will be recorded on your credit report. If you have too many of these inquiries within a short period, it can negatively impact your credit score and make it harder to secure favorable loan terms.

    On the other hand, soft credit checks, such as those done by employers or credit card companies for pre-approval offers, do not impact your credit score. These checks are only visible to you and do not affect your creditworthiness in the eyes of lenders.

    How Hard Credit Checks Work in Canada

    Who Can Perform a Hard Credit Check?

    In Canada, certain entities like lenders, credit card companies and telecom providers can perform hard credit checks. However, it’s important to note that they can only perform a hard credit check with your consent.

    When it comes to lenders, there are various types that can request a hard credit check. These include banks, credit unions, and online lenders. Each entity has its own criteria for determining whether a hard credit check is necessary. For example, banks may require a hard credit check for mortgage applications, while credit card companies may perform one when you apply for a new credit card

    Telecom providers, on the other hand, may conduct hard credit checks when you sign up for a new phone plan or apply for a contract. They use this information to assess your creditworthiness and determine whether you are meeting the minimum credit score requirements to get a mobile phone contract.

    Landlords also have the ability to perform hard credit checks as part of their tenant screening process. By reviewing your credit history, they can gain insights into your financial responsibility and determine whether you are a reliable tenant. 

    It’s also worth mentioning that potential employers can request a credit check as part of their hiring process, but they require your written permission to do so. Not all employers conduct credit checks, but certain industries, such as finance and government, may prioritize this step for specific roles.

    The Process of a Hard Credit Check

    When you apply for credit in Canada, the lender typically initiates a hard credit check. They will request your consent and gather the necessary information to perform the check. This information includes your full name, address, social insurance number, and sometimes your date of birth.

    Once the lender submits the request, they receive a credit report from one or more of the major credit bureaus in Canada, such as Equifax or TransUnion. These credit bureaus compile your credit history, payment patterns, and other relevant financial information into a comprehensive report. The lender then reviews this report to assess your creditworthiness.

    It’s important to note that the information in your credit report is constantly being updated. This means that every time a lender or other authorized entity performs a hard credit check, it leaves a mark on your credit history. These marks, known as hard inquiries, are visible to other lenders and can potentially impact your credit score.

    While hard credit checks are necessary in certain situations, it’s important to be mindful of how frequently they are performed. Multiple hard inquiries within a short period of time can indicate to lenders that you are actively seeking credit, which may raise concerns about your financial stability.

    On the other hand, soft credit checks, also known as soft inquiries, do not impact your credit score and are typically used for background checks, pre-approved credit offers, and by individuals checking their own credit report.

    How to Minimize the Impact of Hard Credit Checks

    Spacing Out Credit Applications

    If you’re planning to apply for multiple forms of credit, it’s crucial to space out your applications wisely. Applying for credit all at once can lead to multiple hard credit checks within a short period of time, which can negatively impact your credit score.

    By spreading out your applications over a more extended period, you give your credit score time to recover from the temporary impact of each hard inquiry. This helps maintain a healthy credit profile and signals responsible financial behavior to potential lenders.

    Pre-qualification and Rate Shopping

    When shopping for a mortgage or auto loan, it’s common practice to explore multiple lenders and compare rates. Fortunately, these scenarios typically fall under the umbrella of rate shopping, which means that multiple credit checks are treated as a single inquiry.

    For instance, if you are shopping for a mortgage and submit multiple applications within a short period of time, credit bureaus recognize that you are rate shopping and consolidate the inquiries into one. This minimizes the impact on your credit score, allowing you to find the best rates without sacrificing your creditworthiness.

    Phew! We’ve covered a lot of ground. Congratulations on becoming an expert on hard credit checks in Canada. Remember, understanding how credit checks work is essential to make informed financial decisions and maintain a healthy credit score. So the next time you apply for credit, you’ll be armed with the knowledge to navigate the process with confidence.

    Credit Building by KOHO
    Credit Building by KOHO
    Take out a line of credit, pay it off on time and build your credit history. We'll be with you every step of the way.

    Only $10/month for 6 months

    About The Author: Arthur Dubois
    Arthur Dubois is a personal finance writer at Hardbacon. Since arriving in Canada, he has managed to build his credit score, which he monitors for free using Borrowell. Arthur invests in the stock market without paying any fees through the online broker Wealthsimple Trade and earns 2.5% interest on the money he keeps in his EQ Bank's Savings Plus Account. He pays for his online subscriptions using his prepaid KOHO credit card, and uses his BMO CashBack Mastercard for most of his in-store purchases. When he buys bitcoins, it’s with the BitBuy online platform. Of course it goes without saying that he uses the Hardbacon app so that he can manage all of his finances from one convenient place.

    More recent stories


    Borrowell Credit Builder Review 2023: Boost Your Score Without Borrowing?

    Is your credit in the crapper? It might be time to try the new Borrowell Credit Builder program. This handy new feature could help boost your score without borrowing a dime. No hard credit check, no debt, and no commitment required. It kind of feels like they just handed us another set of keys to […]

    Read More

    What Does a 900 Credit Score Mean in Canada?

    A 900 credit score is perfect and basically the holy grail of scores. A credit score is a measure of your creditworthiness. It is a three-digit number that tells a lender if you are fit to be given a loan. A higher credit score shows that you are more likely to repay your debt as […]

    Read More

    13 Ways to Get Your Credit Score for Free in Canada

    Everyone should be able to check their credit score for free. The importance of credit scores cannot be overstated. They tell a lot about your financial situation including how reliable you are at repaying your debts. This is why it is important to keep an eye on your credit report and ensure it is true […]

    Read More