Soft vs. hard credit inquiries – what’s the difference? | Refresh Financial

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Soft vs. hard credit inquiries – what’s the difference?

Soft vs. Hard Credit Inquiries – What’s the Difference?

Have you ever applied for a credit card? An auto loan? Maybe a new cell phone plan? If so, you’ve probably been told that your credit will be checked, and that it will be a ‘hard’ credit inquiry. You might be asking yourself… Soft vs. hard credit inquiries – What’s the difference?

We're going to take a closer look at what credit inquiries are, the different types of credit checks and how they can affect you.

What is a credit inquiry?

A credit inquiry is when an organization or individual requests to see information stored in your credit file. This is commonly referred to as a credit check. They do so to see what type of borrower you are. Do you pay back the money you borrow? Do you pay it back on-time?

What is a soft credit check?

A soft credit check is something a potential landlord or employer can do. They request to see your credit file for informational reasons to determine your eligibility for the rental unit or the job. Landlords use your credit information to screen for potentially troublesome tenants, and employers do the same to see how responsible of a person you are. Are you a risk to hire? Or are you reliable and take your commitments seriously?

Soft checks are purely for informational reasons and not for the purposes of assessing your risk in repaying a loan. Soft checks can occur without your permission and they do not negatively affect your score. When you check your own credit score it's considered a soft check.

What is a hard credit check?

When a lender checks your score after you’ve applied to borrow money, it will be a hard credit check. These types of credit checks require your permission before they’re carried out, however, they can reduce your score.

Lenders want to assess your level of risk before even considering loaning you any money. Generally speaking, the lower your credit score, the higher the chances are that you will not repay the full amount. In some cases, the risk is too great, and a lender chooses not to loan you any money. In other cases, they agree to loan you the money, but at a very high interest rate, so that they recoup their money faster.

For example, on a $10,000 car loan, spread over 5 years, someone with bad credit (less than 500) might pay $323 a month for a total repayment of  $19,380. The lender gets their $10,000 back within 2.5 years. The next 2.5 years of payments are profit for them! The same person with a good credit score might pay $179 a month on the same $10,000 for the same 5 years. The total paid? $10,740. That's a savings of $8,640!! The lender doesn't get their full $10,000 back until almost the very end of the loan term - at 4.5 years. But they are not worried about getting it, as the borrower has such a great repayment history. 

See how it works? It all comes down to risk for the lender. Are they going to get their money back? If you're a risk, they want to get it back as fast as possible, and therefore charge you much higher interest rates.

Too many hard credit inquiries?

Too many inquiries can make you appear desperate because a hard credit check indicates that you are actively looking to borrow money. This can negatively impact your score. Hard credit checks can remain on your credit report for up to six years.

How to recover from a hard inquiry

What can be done to reverse the damage from numerous credit checks?

The best way to allow your score to recover is with time. Try and wait as long as you can before incurring any more hard inquiries. This means you may have to wait a few months before applying for credit products or look at actively rebuilding your score through credit rebuilding programs.

Play it smart

Looking for a credit card or maybe a loan? Something to avoid is the ‘apply until you get approved’ strategy.

Instead, check your score yourself and speak with your financial institution. Having an understanding of where your credit score is, will give you an idea of whether you’ll be approved for the credit product you’re after and if it’s worth the hard credit check once you apply.

If you already know your credit score, you can avoid needless credit checks by consulting with your financial institution and applying for products that you’ll likely be approved for.

The exception

In Canada, mortgages, student loans, and auto loans are the exception. In this arena, multiple credit checks in a short period of time, are treated as a single inquiry. This will allow you to continue shopping around for the best deal!

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Refresh Financial's credit builder loan can boost your credit score and put savings into your bank account to help you pay off your debt.

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