Every time someone looks at your credit file – even you – it’s recorded. You probably know that usually these inquiries, sometimes called “hits,” “checks,” or “pulls,” can impact your credit score.
There often is confusion, about “soft checks” versus “hard checks,” how much a hard check affects your score and whether several hard inquiries in a short period – such as when you’re shopping for a car – are counted individually or as one.
Here’s the breakdown of how credit checks work:
Permissible credit checks and permission
“Under no circumstances can anybody access a credit file without consent and permissible purpose, which is governed by regulations by province,” says Julie Kuzmic, senior product manager with Equifax Canada.
Exactly what is considered permissible purpose differs by province, but most are what you’d expect – when you’re applying for credit, such as a credit card, loan or mortgage, or when you’re applying for rental accommodations, such as an apartment.
Other permissible credit checks are not so obvious, such as when you’re applying for some jobs, or even when you’re applying for insurance. TransUnion spells out many of the general permissible purposes on its website.
“But in all those cases, the consumer also has to have given consent,” says Kuzmic.
Hard versus soft credit inquiries
While every inquiry does show up on your credit report, there are some that only you and the person making the inquiry can see. These are “soft” checks.
“Soft credit checks typically occur when a prospective borrower or a third party reviews credit for non-lending purposes (applying to rent a home, applying for a job, applying for insurance),” Aaron Boles, vice-president of communications at the Canadian Bankers Association, said in an emailed response to questions.
“A current creditor can perform a regular review of the credit report and this would result in a soft credit check,” Boles said.
Requesting your own credit report also will result in a soft hit.
“Hard inquiries are associated with credit-seeking behaviour,” says Kuzmic. Whenever you apply for credit, a hard hit will show up on your report and stay there for future lenders to see.
The information received with both types of inquiries is the same.
“The only difference would be in the inquiries section of the file,” Kuzmic says. “Only the consumer can see the soft inquiries, so those wouldn’t be visible to anybody else.”
Credit checks and credit scores
Another potential difference between inquiries is that not every credit check will include a credit score.
“The credit file is where all the information is collected on a consumer,” says Kuzmic. This would include details about any loans, credit cards or mortgages you have – who they’re with, how much you owe, whether you make your payments on time, and so on.
Your credit score is a three-digit number between 300 and 900. A higher number means you are perceived to be a better credit risk.
“Sometimes people refer to credit scores as being like a report card. It’s not quite,” says Kuzmic. “It’s actually a prediction of future performance.”
So that’s something that’s important for, say, lenders who want to approve you for credit, but perhaps not for an employer who is assessing you for potential employment.
“It’s two different price points,” Kuzmic says. “They have to pay for the credit file. If they want a score as well, they pay more.”
Why you need to limit the number of hard inquiries
Hard hits are seen by anyone who checks your credit file, and those people can make assumptions based on how many you’ve had.
“The credit-seeking inquiries have been statistically shown to impact future performance, which means they can impact scores for some people,” says Kuzmic.
There are some exceptions.
“Say you’re in the market for a mortgage, and so you go to two or three lenders,” says Patricia White, executive director of Credit Counselling Canada. “They’re going to show up as inquiries on your credit report. Generally, that’s OK because potential lenders get the idea that you’re searching for the best rate.
“But if you’re always seeking credit, it doesn’t look good,” White adds.
“If there are too many credit checks on your report, lenders may think you’re urgently trying to get credit or trying to live beyond your means,” Lynne Santerre, media relations officer with Financial Consumer Agency of Canada, said in an emailed response to questions.
This can have a negative effect on your credit score, says White.
“But it’s not significant,” she says. “Your score should come back up. Inquiries [do not] make up the bulk of the credit score.”
Santerre recommends doing the following to control the number of hard credit checks on your file:
- Limit the number of times you apply for credit.
- Get your quotes from different lenders within a two-week period when shopping for a car or a mortgage so that the credit hits are combined and treated as a single inquiry for your credit score.
- Apply for credit only when you need it.
Can a hard inquiry become a soft inquiry?
It’s also important to check your credit report at least once a year.
“We certainly recommend that people check their credit on a regular basis,” says White. “You really should know what’s on your report. There might be errors there.”
Honest mistakes are rare, Kuzmic says, but they can happen, such as when two people with very similar names live in the same large apartment building. She also recommends checking your credit file with both credit reporting agencies, Equifax and TransUnion.
“It is common for an error to be on one and not the other,” she says. If you check your credit report regularly, you can catch potential errors before it’s too late – for instance, well in advance of applying for a mortgage.
“There’s a lag time to getting errors fixed,” says Kuzmic. “It can take some time to go back and retrace who reported an item in collections.”
You also want to ensure there are no hard inquiries on your report that you didn’t authorize. It might be a misunderstanding, such as when you speak to someone about a credit product that you might be interested in, and they take that to mean you’ve given permission to check your credit file.
“There are also the kind of malicious scenarios, where it’s an intentional kind of identity theft, and you definitely want to be aware of that,” says Kuzmic.
Start by calling the one who requested the credit inquiry. You’ll find their number on your credit report. You can also dispute the inquiry (and other errors) through the credit reporting agency.
“It is a regulatory requirement that any time a credit file is accessed for any reason, it does have to be recorded on the credit file – even if it was a mistake,” says Kuzmic. While Equifax can’t remove an inquiry from the file, they can change it to a soft inquiry.
“The consumer does need to be able to see any time his or her credit was accessed, but it will no longer potentially have any impact on the score,” says Kuzmic.
