Imagine your credit scores as a metaphorical pie that embodies your overall financial health.
This pie is divided into various slices, each representing a distinct factor that contributes to your credit scores. These scores are determined by elements such as your utilisation rate, payment history, credit limit, and the age of your credit.
Additionally, there exists a small segment within this pie that signifies your hard credit search. Also referred to as a credit check. Whenever you apply for additional credit, you consume a portion of this slice. However, it’s crucial to understand the nature of a hard search and comprehend its actual impact on your credit.
What is a hard inquiry?
A hard inquiry typically occurs when a financial institution, such as a lender or credit card provider, checks your credit report to make a lending decision. This usually happens when you apply for a mortgage, loan, or credit card.
A hard inquiry may slightly lower your credit scores, but the impact is usually minimal. In most cases, a single hard inquiry will not have a significant influence on your approval for a new loan or credit card.
Hard inquiries generally remain on your credit report for two years. It is advisable to think twice before applying for multiple credit cards, loans or mortgages simultaneously or within a short period of time.
Having multiple hard inquiries in a brief span may lead lenders and credit card providers to view you as a higher-risk customer, as it implies that you may have limited funds or are planning to accumulate a substantial amount of debt. Therefore, it is recommended to space out your credit applications.
What is a soft inquiry?
A soft inquiry typically happens when an individual or company reviews your credit as part of a background check. For example, a credit card provider may conduct a soft inquiry to assess your eligibility for specific credit card offers. Similarly, your employer might perform a soft inquiry before hiring you in order to verify your identity.
Unlike hard inquiries, soft inquiries are not linked to a specific application for new credit and therefore do not impact your credit scores.
Examples of hard and soft inquiries
Companies do not always require your consent to perform a credit search, but they must have a valid reason, such as when you apply for a loan with them. Here are some examples to help you understand when a hard or soft inquiry may be conducted on your credit reports.
Please note that these lists are not exhaustive and should be considered as general guidelines…
Common hard inquiries:
- Mortgage applications
- Bridging finance applications
- Loan applications
- Credit card applications
- Utility company applications
- Monthly mobile phone contract
Common soft inquiries:
- Checking your own credit report
- Employment verification (e.g. background check)
- Identity verification when seeking insurance quotes
- Mortgage Agreement In Principle (not all lenders)
If you’re unsure about how a specific inquiry will be classified, it is best to ask the company, credit card provider, or financial institution involved to clarify whether it is a hard or soft credit search.
In essence, your credit scores have a significant impact on your overall financial situation. It is advisable to dedicate some time to enhancing your credit scores before seeking credit. By having a stronger credit profile, you increase the likelihood of obtaining the desired financial products on favorable terms and interest rates.
To remain informed about any hard inquiries that could potentially affect your credit score, it is advisable to regularly review your credit report. Although a single hard inquiry may not have a significant impact on your credit score, multiple inquiries within a short span of time can potentially inflict considerable damage.
Contact Orchard Mortgage Solutions today on 01257 543013 for further information.