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What you need to understand about hard and soft credit checks

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The world of finance and consumer credit can be confusing with different reports, scoring systems and checks. We’re here to clarify some of the jargon. We will also explore the importance of looking after your credit score and the impact that credit checks can have.

The difference between Hard and Soft Credit Checks

Knowing the difference between hard and soft credit checks will help you manage your credit score and apply for new credit in the future.

What is a credit check?

A credit check or credit search is the process that companies undertake in order to look up an individual’s credit report detailing their financial history. The report often includes details of current credit agreements, repayment history, details of credit searches and the individual’s overall credit score.

The information provided by a credit check enables companies to determine how reliable the individual is, in order to assess a credit application.

What is a credit score?

A credit score is a numerical expression based on an analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Financially speaking, a person’s credit score is very important. Lenders use a borrower’s credit score when deciding whether or not to give them a loan, and if so, how much interest to charge them. A high credit score means you’re a low-risk borrower, which could lead to a lower interest rate on your loan. A low credit score could lead to a higher interest rate and could mean you won’t be approved for the loan at all.

What is the difference between a soft and hard credit check?

There are two types of credit checks: hard checks and soft checks. A soft credit check does not leave a visible trace on your credit file that can be seen by other lenders, and for this reason, does not impact a person’s credit score. An example of a soft credit check is where an individual reviews their own credit report, checking for the accuracy of data.

Hard credit checks look into your entire credit report, and are most commonly used by lenders and landlords. This type of inquiry can have a negative impact on your credit score. The process of a hard check being undertaken leaves a record upon an individual’s credit report that other potential lenders could view. Every hard search is recorded on an individual’s credit report, no matter if the credit application is successful or not.

Why must you be aware of the differences between the two
types of credit checks?

As discussed, hard searches appear on your credit report for other potential lenders to see. Therefore, lenders can also use the history of hard searches when assessing credit applications.

The possible impact of too many hard searches in a short time could illustrate that an individual is seeking an increase in overall credit urgently, which could suggest financial difficulties.

If lenders get a whiff of the fact that you are applying for a loan at multiple banks and institutions, they will be less willing to lend to you, anticipating overspending or reckless financial decisions. This is especially true for those over 50, with fewer years of earning capacity to pay off these loans, when compared to those in their 30s or 40s.

Even if you have no intention of borrowing beyond your means or making big splurges, just making multiple loan applications, resulting in hard credit checks within a short span of time is a red flag in itself. As a result, it is best to explore personal loan comparison sites, and only apply for lenders and offers that you are absolutely certain of getting approved for.

The impact of a single hard search on a credit score is often minimal. However, should a series of hard credit checks have been requested in a short time, this could impact a credit score more seriously. Therefore, consideration should be taken before giving permission for each hard search to be undertaken in order to protect and maintain your credit score.

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