Credit checks, what are they?

There are two types of credit checks, soft credit checks and hard credit checks. The main difference between soft and hard credit checks is the impact they can have on your credit score.

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What is a credit check?

A credit check, or a credit search, is when a company looks to understand your financial behaviour by reviewing information from your credit report. Your consent isn’t always required to conduct a credit check, but the company doing one must have a legitimate reason (i.e. you have applied for a loan with them)

Companies that may perform a credit check include:

  • Banks and building societies

  • Credit providers

  • Utility suppliers (e.g. gas, water and electricity)

  • Letting agencies and landlords

  • Mobile phone companies

  • Employers (however, they won’t see your full report)

When conducting a credit check, companies may look at your payment history, how much credit you currently have available to you and how you’re managing it

They can also look at any financial associations you have (i.e. someone you share a bank account or mortgage with) and what their credit history is.

When a credit check is performed this is recorded on your credit profile. However, it’s worth noting that checking your own credit report or credit score isn’t.

There are two types of credit check – a soft credit check (or soft search) and hard credit check (or hard search).

What is a soft credit check?

A soft credit check is a quick look at your credit report. It only looks at certain information and it doesn’t affect your credit score.

A soft search doesn’t require your consent and these can be performed as part of a background check or to determine your eligibility for a product such as a credit card or loan.

Because a soft credit check isn’t visible to companies on your credit report, it doesn’t have an impact on your score or any future credit applications.

When you compare credit cards with Monva a soft credit check is performed to determine your eligibility.

What is a hard credit check?

A hard credit check is when a company performs a completed search of your credit report. Each time a hard check is conducted it’s recorded, meaning any company searching your credit report will be able to see you have applied for credit.

It’s important to note that a hard credit check is only kept on your report for two years and after one year it no longer affects your credit score. However, keep in mind that a hard credit check can reduce your credit score by 5-10 points.

Because a hard search is recorded on a credit report, having too many checks over a short period can have a negative impact on your score. This in turn reduces your ability to get approved for credit.

When you apply for a credit card or a loan, the company you apply to will perform a hard credit check to determine your suitability. However, they’re not the only companies who may perform a hard credit check; utility providers and mobile phone companies may also do so when you apply to use their services.

Unlike a soft credit check, hard checks will appear on your credit report. Meaning the more credit applications you make, the greater effect it will have on your credit score and your likelihood of getting credit in the future.

How do hard and soft credit checks differ?

The biggest difference between hard and soft credit checks is the impact they have on your credit score.

Because soft credit checks aren’t visible to companies when they review your credit report they don’t impact your score. However, hard credit checks are visible on your report so there is the possibility that a hard credit check can have a negative affect.

A soft credit check can happen when:

  • You view your own credit report

  • An identity-check is performed by a company

  • You use MoNva to compare credit cards

A hard credit check can happen when:

  • You apply for a credit card, loan, or mortgage

  • You apply to a utility company

  • You apply for a pay-monthly mobile phone contract

What is the benefit of a soft credit check?

Soft credit checks are beneficial when comparing financial services products such as credit cards or loans.

Using a service such as monva to compare credit cards is the easiest way to compare credit cards because we can show you your eligibility for a product before you apply.

There’s also no limit to the number of soft credit checks you can have and as they don’t appear on your credit report they don’t affect your score.

Why do hard credit checks affect your score?

Making many credit applications in a short period of time can indicate to companies that you are in financial trouble, or that you are reliant on borrowing.

As hard checks are recorded on your credit profile they may serve as a signal to lenders that you are a higher risk to lend to. And remember, hard searches can stay on your report for two years.

Is it possible to avoid hard credit checks?

The only way to avoid hard checks is by not applying for credit. So, it’s not really possible to avoid them altogether.

However, you can minimise the number of hard checks on your report by making as few credit applications as possible. To do this, you want to ensure the applications you do make have a higher chance of being successful. You can do this by using a service such as Monva that provides your eligibility for a product or service within your search results. Then when selecting a product to apply for choose one with a higher eligibility rating.

Can you reduce the effect of hard credit checks?

When you have to make credit applications spacing them out can help to reduce the impact on your credit score.

No more than one credit application every three months is a good rule of thumb. However, it’s important to note that companies have different criteria regarding your credit score.

There may be steps you can take to improve your credit score if you do apply for credit and your credit score is affected.

Tags: Credit Cards, Loans