A credit check or credit search occurs when a company requests a credit bureau to look at your credit report to understand your financial behavior. In most cases, your consent is not needed, but the party requesting to look at your report must have a legitimate reason to do so.
Some of the companies that may do a credit search on you include credit providers, banks, utility suppliers, mobile phone companies, potential employers, and letting agencies/landlords.
As part of a credit check, companies may look at whether you have been paying your credit on time and how much you currently owe. Companies may also look at any financial associations you may have.
However, the big question is, does a credit check affect your credit rating? Read on to find out.
Types of Credit Checks
There are two types of credit checks, namely, soft and hard credit checks.
A soft credit check occurs when you or a creditor looking to pre-approve you for a credit card or loan checks your credit rating.
Credit companies conduct a soft credit check to decide whether to approve or reject your application without conducting a comprehensive examination of your credit report. Soft credit checks are not visible to other companies, and only you can see them in your report.
On the contrary, a hard check occurs when a potential lender with whom you have applied for credit reviews your credit report in detail as part of the decision-making process.
For instance, if you apply for an auto loan or mortgage, the lender will request to review your credit report and credit score. If you consent, he/she will contact one of the major credit bureaus and request for your report.
Such inquiries are usually tied to an actual credit application and are visible to everyone who sees your report.
How Do Credit Checks Affect Your Rating?
Soft credit checks are only visible to you and do not affect your score in any way. Whether you are applying for a loan from a bank or a no credit check loan Montreal lender, a soft inquiry doesn’t hurt your score.
However, the same thing cannot be said of hard inquiries.
A hard inquiry will affect your score in different ways.Typically, a hard check may cause a slight change in your credit rating but will have a significant impact on how potential creditors view your report.
The evidence of multiple hard checks within a short period is always considered a red flag for many lenders. This is because each hard inquiry on your report is connected to a request for a new loan. Therefore, multiple requests for new credit in a relatively short period can be seen as a credit risk.
Research shows that individuals with at least six hard inquiries on their credit report may be up to eight times more likely to declare bankruptcy than those with no inquiries.
How Long Do Hard Credit Checks Remain on Your Credit Report?
Fortunately, hard inquiries remain on your report for just two years. Generally, the impact of hard inquiries tends to lessen with time. Even if you have multiple hard credit checks in a span of a few months, good lenders won’t give them too much weight when deciding whether or not to lend you money.