Does a hard credit check affect credit score?

Are some enticing big welcome offers getting you in the mood to apply for a bunch of credit cards to see which ones you might get? Well, you may want to think twice. Applying for credit cards (as well as loans and mortgages and other credit products) can lead to a credit check on your report called a hard pull, which can potentially mean your credit score could decrease.

Understanding what a hard credit check is, how it affects your credit score, and what steps you can take to minimize any negative impacts is a vital component to keeping your credit score strong. It’s also important to understand that, in contrast to hard pulls, soft pulls (things like just looking at your credit file) don’t affect your score at all. Understanding the difference between how a hard credit check can impact your credit score and the difference between hard and soft pulls is the key to keeping your score in good shape.

What is a hard inquiry?

A hard inquiry (also called a hard pull) is a credit check that occurs when a lender or creditor pulls your credit report from one or both of Canada’s credit bureaus (Equifax and TransUnion) to help them decide whether or not you are creditworthy. Most lenders base their lending decisions on an applicant’s credit report because it’s believed to provide insight into how likely a borrower is to honour their loan agreements and repay their creditor in full in the agreed upon period of time. Examples of hard pulls include mortgage applications, auto loans and personal loans and credit cards (unless you’ve been pre-approved).

The reason that hard pulls affect your score is because credit inquiries make up 10% of your credit score. Each time a creditor takes a look at your file, it lowers your score because these types of inquires signal to lenders that you may be having financial difficulties and thus need access to lots of credit. So, while 10% isn’t a huge amount it can still have a significant impact if you are already suffering from a poor score or need a strong score because you need to apply for a loan or mortgage. However, not all inquires actually affect your credit score — which brings us to soft inquiries.

What is a soft inquiry?

A soft pull, also known as a soft inquiry, is a credit check that happens when someone (or even you yourself), checks your credit report simply for informational purposes. Soft pulls do not affect your credit score and are typically used for things like credit card pre-qualification offers, background checks from potential employers or personal credit monitoring. Examples of soft pulls include when you check your own credit score, get pre-approved for a credit card, or a potential employer checks your credit report as part of a background check before they hire you.

How do I know if an inquiry will be hard or soft?

While there are no hard and fast rules as to what is a hard or soft inquiry, there are some general guidelines. You can usually tell if a credit inquiry will be a hard or soft based on two main things: who is performing the inquiry and the reason for the credit check.

Soft inquiries are usually made for informational purposes and therefore don't affect your credit score. Here are some examples of soft inquiries:

• When you check your own credit report or score

• Pre-approval offers from credit card companies

• Employer background checks as part of the hiring process

• Insurance quotes

• Periodic account reviews by your current creditors

Hard inquiries are typically made when you’re applying for credit or financing. These types of pulls usually have a negative impact on your credit score. Examples of when you might experience a hard inquiry includes:

• Applying for a credit card

• Applying for a loan, such as a personal loan, auto loan, or mortgage

• Renting an apartment

• Applying for a new mobile phone contract

If you’re not certain about whether your potential lender will be doing a hard or soft pull, it’s always wise to ask and they should be able to tell you. If you’re worried about your score and you don’t have a good rating, it may be best to put off applying for new credit until you can improve your score.

What impact does a hard inquiry have on my credit score?

A hard inquiry can have a negative impact on your credit score — however, it’s important to not exaggerate the influence it will have on your score. There are two important things to keep in mind:

1. The impact is temporary. While it can stay on your report for as long as 36 months it may be removed sooner. A hard pull is not like a bankruptcy that stays on your credit file for at least six to seven years.

2. The impact will be minimal. Sure, there’s no denying that a hard pull will affect your credit score but keep in mind that credit inquires are one of the most minor influences on your score and only account for 10%. In general, you likely won’t lose more than 5 or 10 points for a hard pull. That’s being said, 5 or 10 points can mean a lot if you already have a low score. It’s also worth noting that while one inquiry won’t have a significant affect, multiple hard inquiries within a short period of time can have a larger impact on your score and would be harder to recover from.

Each hard inquiry can lower your credit score by a few points, typically between 5 and 10 points, but the impact can vary depending on your overall credit history.

How Can You Avoid or Minimize The Effect Of A Hard Credit Check On Credit Scores?

While hard pulls can have a negative impact on your credit score, there are steps you can take to minimize the impact. Here are a few suggestions: to avoid the effect of a hard credit check on your score:

1. Try to limit the number of credit applications you make or only apply for credit when you really need it and are confident that you meet the lender's score threshold and requirements.

2. Check your credit report regularly: Stay on top of your credit report by checking it regularly for mistakes. If you notice any errors, dispute them with the credit bureaus right away.

3. Space out credit applications so that you can avoid making multiple credit applications within a short period of time.

4. Consider pre-qualification: Contact your lender or credit card company to see if they offer pre-qualification, which allows you to get an idea of whether you're likely to be approved for credit without a hard credit check.

By taking these steps, you may be able to help protect your credit score from the negative impact of hard credit inquiries.

How can I improve my score after a hard inquiry?

A hard inquiry can have a negative impact on your credit score, as it can indicate to potential lenders that you are applying for credit and taking on more debt because you are experiencing financial difficulties. However, there are several steps you can take to improve your score after a hard inquiry:

1. Pay down debt: One of the biggest factors that affects your credit score (it counts for 30%) is your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. By paying down your existing debt, you can lower your credit utilization ratio and improve your score.

2. Make all payments on time: Nothing is more important then your payment history when in comes to calculating your credit score. Make sure you make all payments on time and in full so you don’t start accumulating high-interest debt.

3. Monitor your credit report: It's important to monitor your credit report regularly to ensure that there are no errors. If you find any mistakes, dispute them with the credit bureau.

4. Use credit responsibly: Avoid applying for too much credit at once, as multiple hard inquiries can lower your score. Only apply for credit when you really need it or when you’re sure you meet the creditor’s qualifications.

5. Consider using a credit-building tool like KOHO: KOHO offers a credit building tool to help you improve your credit score. By providing some basic information and undergoing a soft credit check, you will receive a balance that KOHO will report to credit bureaus each month as repayment history. This will help build your credit history, which you can track through KOHO's app. This process does not require an application, approval, or deposit and does not involve hard credit checks.

While hard credit checks can decrease your credit score, the impact is only temporary and generally minimal, as inquiries only account for 10% of your score. It's important to understand the difference between hard and soft inquiries, and to avoid multiple hard inquiries within a short period of time.