A credit check is a regular financial process you will likely encounter more than once. As the name suggests, it is a checking process that entails examining your credit history.
It’s important to note that there are two types of credit checks. Hard and soft credit checks are very different from each other despite serving largely the same purpose.
If you’re going to give into the ‘Money Truths for a Wealth Mindset’, you’ll need to know what exactly separates the two and how they can affect your credit standing.
Soft Credit Checks
What is a soft credit check?
A soft credit check is done to check your background or for purely informational purposes. Any inquiries of this nature are not visible to other parties requesting a soft credit check in the future, whether they are lenders or creditors. The individual being checked will have access to data on all soft credit inquiries done if they check their credit report.
According to the 2023 FICO UK credit card market report, the average card spend has increased yearly while outstanding balances are being paid less. This means that creditors and lenders will likely be keen to analyze the implications of soft credit checks more thoroughly than before.
What is the process and impact of a soft credit check?
A soft credit check is done when a specific party requests your credit history for information and practically has no real impact on your credit standing. Your score won’t decrease from one as it is less comprehensive than a hard credit check.
Soft credit checks don’t require your approval, so creditors or other relevant parties don’t need to ask your permission to get this information.
When are soft credit checks conducted?
According to Upgraded Points, credit card companies, insurance companies, potential employers, and yourself often conduct soft credit checks. Because soft credit checks don’t impact your score, you can make a soft inquiry whenever you want to check your credit report. Even monitoring services like Mint are considered soft pulls, but there’s no limit to how many you can make.
Soft credit checks for pre-employment screening still require your consent despite these generally not requiring your knowledge. Depending on where you live and plan to work, different states and regions will have specific laws regarding this, so it’s best to read up on your rights. Though certain applicable laws prohibit using these tools as a reason to reject job applications, many employers still use them to check your trustworthiness and financial responsibility.
Hard Credit Checks
What is a hard credit check?
A hard credit check is a more thorough appraisal that does have an impact on your credit score. It leaves a visible footprint on your credit history and will be seen by any future institutions requesting an inquiry. This type of credit check is typically more significant than a soft one because it is used to assess your creditworthiness.
What is the process and impact of a hard credit check?
Hard credit checks require your consent before they are conducted. You need to be wary of how many hard credit checks you are getting because each one temporarily causes your credit score to lower. It usually takes around a year to two for your score to completely recover from the decrease caused by a hard inquiry.
Although this pull only decreases your score by a few points, it can have major repercussions if you have too many in a short period. These also stay visible on your report, which may raise red flags with potential credit lines.
With more than a fifth of adults in Great Britain experiencing financial pressure and looking to borrow money, it’s essential to note these potential challenges. Even considering the need for financial resources, it’s better to space out your applications for loans and credit to avoid worsening the situation.
When are hard credit checks conducted?
Lenders, utility companies, credit card companies, mortgage providers, and landlords request a hard credit check. They usually use this as a screening tool to see your eligibility, as it provides a comprehensive breakdown of your financial history, payment habits, and any existing loans and bills.
The contents of your credit report are meant to provide a solid picture of your financial responsibility, which will help relevant parties decide whether you are suitable or too much of a risk. Whenever you take out a major loan, try to rent a residential space, or take out a mortgage, you will need to consent to a hard credit check. There are around two million UK households behind on bill payments, so institutions tend to be more stringent on the implications of this procedure.