When you apply for a loan, the first thing hits your mind is whether the lender will run a hard credit check or soft credit check. A lender will always examine your credit report to assess the default risk before signing off on a debt. Of course, the lender will rebuff your application if your repayment capacity is hung in the balance.
Many borrowers take out loans for bad credit due to common perception that these loans do not bear hard credit check, leaving no hard inquiries on credit reports. Well, there is no point of making you believe what is in grey shade.
Lenders never inform you of the type of credit search they make before approval or rejecting your application. Approval makes you float in the air and rejection throws you in eternal desperation. You continue to apply for the loans without realising the difference between hard and soft credit check.
What is a credit search?
A credit search is an act of getting your credit report from credit reference agencies like Experian, Equifax and TransUnion to peruse your financial condition. The lender will never take your consent before doing so as they have genuine reasons after all you have applied for a loan. It is crucial to know how much debts you are managing and the payment history. It helps them know about your repayment capacity and creditworthiness. Banks, credit card companies, direct lenders, cell phone companies, utility suppliers and employers look over credit reports.
There are three types of credit check:
- Hard credit check
- Soft credit check
- No credit check
A hard credit search happens when a financial institution completely goes through your credit report. Every time it shows up on your credit report indicating them how many times you have applied for a loan. Multiple loan applications within a short time pull your credit scores. You are likely to be denied when you apply for a loan and if any lender approves, you will end up paying high interest rates.
Hard credit searches happen under following circumstances:
- You apply for a loan, mortgage or a credit card.
- You apply for a monthly mobile contract.
- You apply for a utility service.
Not all lenders run a hard credit check when you apply for loans without guarantor going deeper, they try to know how successful your application can be. These inquiries are made just to pre approve your application. These searches do not leave any footprint on your report, no matter how many they are. They are visible to you only, not to a lending company. There is no risk of losing credit score.
Soft credit inquiries are made under following circumstances:
- You search your own credit report.
- A company checks your identity.
- Some lenders may run it if you apply for a bad credit loan.
No credit check means neither hard inquiries nor soft inquiries are made. Lenders do not run a credit search when you apply for short term loans with no credit check. Since they approve your loan application after considering only your income statement, you may end up very high interest rates.
Why do hard inquiries pull your credit score?
Hard inquiries generally take a toll on your credit score when you apply for multiple loan applications. It indicates that you are desperate to borrow money. Lenders doubt that your repayment capacity. They may assume that you rely on borrowings only and do not return money. Some hard inquiries stay for 12 months and some may stay longer, reducing your ability to take out a loan at lower interest rates.
How can you avoid hard credit searches?
Here are some tips you should follow to avoid hard inquiries:
- Do not apply for multiple loan applications. It cannot be more than one in a period of three months.
- Go through your credit report to make sure there is no erroneous default and your personal details are correct and up to date.
- Ask your lender how you can improve your score.
Most of the lenders run a hard credit check and therefore you should try to have a good credit score. It will help you get the best loan deals at lower interest rates.