Before approving a loan or credit card application, lenders and creditors need to assess your financial reliability. This process involves conducting a credit inquiry, often called a credit check, where they review your credit history and score. The outcome of this check plays an important role in determining your creditworthiness and whether your application will be approved. However, not all credit inquiries are the same. There are two types of credit inquiries, soft and hard inquiries. Soft credit checks in Canada and hard inquiries can impact your credit score, potentially lowering it by a few points, while soft inquiries are more of a routine check that does not affect your score.
Understanding the difference between these two inquiries is important, as it can help you better manage your credit profile and avoid unnecessary dings to your credit score. In this blog, we will talk in-depth about how these inquiries work when they occur and what you can do to keep your credit score intact while navigating loan and credit applications.
Understanding Soft Credit Inquiries
A soft credit inquiry, often called a “non-credit-related inquiry,” allows certain parties to access your financial history. This includes details such as your payment history, existing loans, lines of credit, and credit utilisation ratio, among other relevant economic data. Unlike a hard inquiry, this check does not affect your credit score. A soft credit check in Canada is conducted for reasons unrelated to new credit applications. For instance, they may occur when you apply for a rental lease, check your credit report, or even when employers run a background check for employment purposes. These inquiries are harmless and won’t lower your credit score, making them a safe way for you or others to review your financial standing.
Lenders also use soft inquiries in the prequalification process to get a general sense of whether you meet their credit criteria for loans or credit cards. This allows them to assess potential borrowers without triggering a formal credit check. However, it is important to note that even if you are prequalified, a hard inquiry is still required for the final approval of the loan or credit line.
A soft credit check in Canada, often called a smooth pull, can occur for various reasons, including the following:
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- Reviewing Your Credit: When you check your credit report, it results in a soft inquiry.
- Loan Prequalification: Some lenders perform a soft pull to prequalify you for a loan during the rate shopping process.
- Preapproved Offers: Companies may review your credit through a soft inquiry to determine your eligibility for special promotional offers.
- Employment Screening: Employers often conduct soft inquiries as part of their background checks during the hiring process.
- Utility Setup: When you apply for utilities at a new residence, the service provider may check your credit with a soft inquiry.
- Reviewing Your Credit: When you check your credit report, it results in a soft inquiry.
Each of these soft inquiries has no impact on your credit score, making them routine checks that do not affect your creditworthiness.
Understanding Hard Credit Inquiries
A hard credit check inquiry is a formal evaluation of your credit report and is usually required whenever you apply for a loan, credit card, or any type of credit. It offers lenders a comprehensive view of your credit history, including key factors such as your credit score, the length of your credit history, the types of credit you have used, and other financial details.
One important aspect to note is that a hard inquiry can temporarily lower your credit score. However, if you apply for multiple lines of credit within a short period, such as within 45 days, these are typically treated as a single inquiry. This allows consumers to compare loan options, such as mortgages or car loans, causing minimal harm to their credit scores.
Here are the most common situations where you are likely to come across a hard inquiry:
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- Applying for a credit card: Every time you submit a credit card application, a hard inquiry is initiated.
- Financing or leasing a vehicle: If you secure a loan from a bank or dealership to buy or rent a car, you will be subject to a hard credit check.
- Purchasing a home: When applying for a mortgage, the lender will perform a hard inquiry to assess your creditworthiness.
- Applying for a personal loan: Like other loans, personal loan applications will trigger a hard credit check inquiry by the lender.
- Renting or leasing an apartment: In this case, you may encounter a hard or soft inquiry. It is best to confirm with the landlord or leasing agency what kind of credit check will be conducted.
- Applying for a credit card: Every time you submit a credit card application, a hard inquiry is initiated.
Since hard inquiries have a temporary (negative) effect and remain on your credit report for up to 3 years, lenders require your exclusive consent before conducting one. If you are applying for a job, it’s good to ask whether the employer will run a hard or soft credit check, as the distinction impacts your credit score. Understanding when and how hard credit check inquiries occur helps you better manage your credit health and make informed financial decisions.
Minimising the Effect of Credit Inquiries on Your Score
Completely avoiding hard inquiries is nearly impossible unless you choose to never apply for any type of credit. However, you can use several effective strategies to minimise their impact on your credit score. By being selective about when and where you apply for credit, planning your applications wisely, and understanding how hard inquiries work, you can reduce the risk they potentially might cause. In the long run, making informed decisions about credit applications can help preserve the health of your credit score while still allowing you to access the financial products you need.
Let us explore some practical steps to limit the effects of hard inquiries and keep your credit score intact.
Timing Your Credit Applications for Minimal Impact
Although hard inquiries can impact your credit score, the good news is that your score will recover over time. Spacing out your credit applications gives your score the necessary time to bounce back between inquiries. It is important only to submit one credit application within a short time frame, as this could lead to a more significant drop in your score. This is especially true if you are considering applying for a mortgage soon, as lenders may view recent multiple hard inquiries as a red flag, raising concerns about your financial stability. Being mindful of the timing of your applications can help protect your credit score and improve your chances of loan approval.
Addressing Errors on Your Credit Report
Since hard inquiries require your exclusive authorisation, you have the right to dispute any inquiries that appear on your credit report without your consent. Regularly reviewing your credit reports from Equifax and TransUnion is important to secure your financial health. While this may seem time-consuming, it is an important step in preventing fraud and maintaining control over your credit. Regular monitoring ensures you catch any unauthorised activity early and helps you stay on top of your financial management.
Take Advantage of Pre-Qualification Offers
The lender performs a soft credit check when you opt for pre-qualification for a loan, mortgage, or credit limit increase. This type of inquiry won’t impact your credit score, so there is no need to worry about it affecting your financial standing. You can even request pre-qualifications from multiple lenders to explore and compare your options without any negative consequences. Once you have selected the lender that best suits your needs, you can proceed with a formal application, resulting in a single hard credit check inquiry. This approach helps you limit the number of hard inquiries on your credit report, maintaining your credit score while allowing you to shop around for the best deal.
Exceptions to Standard Credit Inquiry Guidelines
You have flexibility when shopping for specific types of loans, such as a mortgage. Credit scoring models allow for multiple loan applications within a designated period, ranging from 14 to 45 days, depending on the model, to be treated as a single inquiry. Although each application will still appear on your credit report, only one will count against your credit score. This exception allows you to compare rates and terms across different lenders without harming your credit score, allowing you to make a well-informed decision while protecting your financial health.
Conclusion
A strong grasp of the differences between hard and soft credit checks in Canada is essential for preserving a healthy financial profile. Hard inquiries can lower your credit score for up to 12 months and stay on your credit report for as long as two years, while soft credit check in Canada inquiries have no impact on your score. Understanding this distinction makes you make more informed decisions when applying for credit.
To protect your credit score, it’s important to limit hard inquiries. Only apply for new credit when necessary, and consider getting preapproved or pre-qualified with multiple lenders to explore your options without affecting your score. Additionally, research and compare financial products before submitting formal applications, ensuring you make decisions that align with your long-term financial goals. These proactive measures can help you maintain a strong credit profile, protect your creditworthiness, and achieve better economic outcomes in the future.
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Frequently Asked Questions (FAQs)
Yes, credit inquiries can affect your score in Canada. Hard inquiries, such as applying for a loan or credit card, can lower your credit score slightly and stay on your report for up to 3 years. Soft inquiries, like checking your credit or pre-qualifying for a loan, do not impact your score.
In Canada, hard credit inquiries remain on your credit report for 3 years. However, they only impact your credit score for about 12 months before they stop affecting it. Soft inquiries do not appear on your report and have no prolonged impact on your score.
You can request inquiries removed from your credit report only if they are unauthorised or incorrect. Start by reviewing your credit report and disputing any inquiries you did not initiate. Contact the credit bureaus or the creditor directly to begin the removal process. Remember that legitimate hard inquiries you authorised can only be removed once they naturally fall off after two years.
No, credit inquiries are not permanent. Hard inquiries remain on your credit report for up to 24 months, though they typically only affect your credit score for up to a year. Soft inquiries, on the other hand, do not impact your score and may not be visible to others reviewing your credit report. Do credit inquiries affect your score in Canada?
How long does it take for inquiries to fall off Canada?
Do you need help getting inquiries removed?
Are credit inquiries permanent?
