What is the difference between hard and soft credit checks in Canada?

Did you know that the way someone accesses your credit file can actually lower your credit score? Yikes! You need to watch out for that because your credit score is your passport to better interest rates, lower premiums, and maybe even your dream job.

Soft vs Hard Credit Checks

Canada’s financial system is governed by a set of strict regulations which ensures the safety and security of consumers. In terms of a soft vs hard credit check, the system is standardized and is performed by the two major bureaus in Canada.

A credit check can either be soft or hard, depending on the purpose of the inquiry.?Because a soft vs hard credit check is performed for different reasons, one has zero impact on your score while the other could have a siginificant impact. Let’s take a look at the effect of soft vs hard credit checks, who does them, why, and when.

When you apply for a new loan with a financial institution or private money lender, it can affect your credit score. A hard pull or ‘hard credit check’ is when a lender makes a credit inquiry because you applied for something like a personal loan, mortgage, credit card, etc. You started the process when you submitted your application and consented to a credit check.

When that happens, the lender requests information from a recognized credit bureau in Canada. The credit bureau shares data with the person or the financial institution after ensuring their credibility. In Canada, the credit bureaus are Equifax and TransUnion.?

However, you can always check your credit file to see which financial institution or lender has checked your creditworthiness. Usually, credit inquiries remain on your credit report for up to two years. Of course, a lot of banks and apps let you check your credit score for free, but they are not reporting agencies.

What can trigger a hard credit check?

A hard credit check takes place if you have specifically applied for something that’s as small as a credit card or as big as a home mortgage. In this case, the lender will assess your credit history and will accordingly make the decision of approving or rejecting your application.

As mentioned before, they will require your consent before proceeding with a hard credit check. Of course, mistakes happen. That is why it is always a good idea to check your credit score for mistakes. There shouldn’t be any random hard credit checks on your profile that you did not consent to.

Does a hard credit check hurt your credit score?

When the lender conducts a hard credit check, it will almost always have some sort of impact on your credit score. People with very good credit will likely see only a few points come off, and their credit score will rebound quickly. Those will lower scores may see more points come off and their score could take a little longer to recover.

If you notice a significant decline in your credit score, it most likely has to do with how many hard credit checks you’ve had within a certain period of time.?A hard credit check will be recorded as an Inquiry on your credit report and will stay there for up to 3 years.

If you apply for multiple loans or credit products in a shorter period of time, it can have a very negative impact on your credit score. Lenders consider it a red flag that indicates you may be experiencing financial distress and desperate for credit. Because it’s a red flag for potential trouble, it lowers your credit score.

What’s a soft credit check??

A soft credit check impacts your life in a lot of ways but it does not impact your credit score. Soft credit checks let lenders and other interested parties analyze your credit too but for different reasons.

Unlike hard credit checks, soft checks are not used to calculate your credit score by Equifax or TransUnion. This means your credit score will remain unchanged when a lender performs a soft credit check because you did not apply for lending or credit.

For example, a soft credit check is what happens when you check your own score for free via applications like Borrowell, ClearScore, or your bank. A soft check can help you prequalify for a specific type of loan or a line of credit. When you actually apply for that product, you will need to submit to a hard credit check. ??

Preapproved loans & credit card offers

Ever wonder why you get junk mail from some lenders and credit card companies? You are suddenly pre-approved for something? It makes a lot more sense now. A soft credit check might be the answer. These checks are signals to lenders, rental companies, landlords, banks, and even potential employers. They might like your profile and want your business.

Do soft credit checks appear on your credit file for others to see?

Yes. A soft credit check is visible on your file, but it does not affect your credit score or scare off other lenders. Furthermore, a lender can do these checks without asking for your consent or permission. As Hardbacon has told you before, your credit score can affect your premiums for insurance policies.

When you get hired for a new job, your employer could make a soft inquiry to evaluate your credit history too. The same principle applies to renting a place to live. Your landlord can do a soft credit check, called a rental credit check, to see if you can handle the rent payment and how reliable you are to pay it as agreed.

The Bottom Line

While soft credit pulls don’t impact your score at all, hard credit pulls may affect your score to some extent. Though a single hard pull can negligibly lower your score, multiple hard pulls can exert pressure on your credit report. That’s where you need to be thoughtful when applying for different types of loans or mortgages. Also, there’s no need to give consent for soft credit checks, while you must provide consent to lenders for hard credit pulls.?

This article is the shortened version of an article originally published on Hardbacon.ca by Arthur Dubois under the title "Soft vs Hard Credit Checks in Canada: What You Need to Know".