Are you trying to improve your credit score? You may have heard the term "hard credit check" being bandied about, and are wondering what it means. Let us clear things up for you!
Whenever you apply for credit, the institution will conduct some form of credit check. This means they look up your credit history. This includes your repayment history, how many loans you have applied for, who you have applied with and the amounts you were seeking.
Hard Inquiry
A hard inquiry, also known as a hard credit check or a hard pull, occurs when a lending institution checks your credit to make a lending decision. The inquiry will include a dollar amount, the date of the inquiry and who the inquiry is made by. A hard credit check will drop your credit score by a few points temporarily. This normally isn't a big deal, unless you are applying for multiple loans at once, or frequently. Lenders will be able to see this inquiry for up to two years.
Soft Inquiry
A soft inquiry can include things like checking your own credit score, or when a company checks your score to pre-approve you for a product. They aren't linked to a specific application and therefore do not affect your credit score.
For more on soft inquiries, check out our article here.
When will a hard inquiry occur?
Applying for a specific amount of credit, such as a car loan or personal loan will cause a hard inquiry. That's fairly straightforward. What gets a bit confusing are other lines of credit, such as utility or mobile phone accounts. They will pull a hard credit check, because they want to be sure that you will honour your agreement to pay your bill. If you don't, you'll get a negative report on your credit file, and your score will go down. These are the circumstances that will trigger a hard credit inquiry:
When you apply for a loan or line of credit
When you open a post paid bill account (such as mobile or internet)
When you increase credit limit of an existing account
Wondering what exactly will show as a hard inquiry? It can be a little confusing. For a comprehensive list, read this article.
What does a hard inquiry show?
A hard inquiry will have more information than a soft inquiry, because it is associated with a specific application. A hard credit inquiry contains the following information:
Provider
This is the institution who made the inquiry. This will be the name of the lender, and even the subdivision, such as Commonwealth Bank Home Loans.
Provider type
This details what category of the lender that made the enquiry. This may ot be obvious from the provider name, so it goes into detail about whether it is a bank, other type of lender. It could also be a service provider such as a telco or utilities provider. If you have a lot of inquiries from payday lenders, this will be a bad look.
Product
This shows what type of credit you applied for. This can include car loan, mortgage, credit card and personal loans, to name a few. If you apply for multiple of the same product in a short period, it may show that you are shopping around, and some lenders won't care. But some will interpret it as you having difficulty obtaining a loan, and your creditworthiness, as well as your credit score, will suffer. So the best idea is not to apply until you have found the right loan ie, do your research before applying!
Amount
The dollar amount applied for. Pretty simple stuff
I have a $1 hard inquiry on my file, what does that mean?
It means that your broker is a jerk! Just kidding, but not really. I recently enquired about a home loan, and was very specific that I did not want a hard enquiry. It is possible to get a soft check only when applying for a pre-approval, so make sure you ask. Imagine my surprise when an inquiry for $1 showed up on my credit file!
In short, a lender may conduct a hard check of $1 to have a look at your creditworthiness. They can also do this with a soft check, so there is really no need for this kind of behaviour.
How long will it be on my credit file?
A hard inquiry will remain on your credit file for 2 years. However, it will only affect your credit score for about a year. In addition to this, most institutions will also look at your bank statements to determine your current financial situation. So waiting 2 years for your credit score to bounce back might not be the only option.
Can I ask for a hard inquiry to be removed?
Yes and no. You can't remove a legitimate inquiry from your credit report. In those cases you will have to wait the 2 years for them to drop off.However, as mentioned above, hard inquiries will only affect your score for about a year.
In some cases, a hard inquiry may be conducted in error, or without your permission. An inquiry may appear on your report that was made by someone of the same name. Or, as I mentioned above, a lender may conduct a hard credit inquiry when you specifically asked them not to. In these cases, you may request the inquiry to be removed (I'll let you know how I go with that)
Will hard inquiries affect my ability to get a loan?
Here is the million dollar question! A hard inquiry will cause your credit score to drop temporarily. Several in a row will not only cause your score to drop, but will signal lenders that you are credit hungry. If you have a good income and repayment history, this may not affect your ability to GET a loan. It will, however, affect the interest rate that a lender is going to charge you. Many companies offer tiered rates depending on your credit history. Bad credit scores = bad interest rates. You end up paying more for your bad credit history.
The bottom line
The key takeaway here, and the message I am always trying to impart, is be careful with your credit. I'm a saver, not a soender and I approach credit with extreme caution. Not everyone shares these values. So if you are a credit lover, follow these three steps to protect your credit score:
Don't over-extend your credit
Only apply for credit when necessary
Always pay on time