We often hear people question whether checking their credit score will hurt it. Our usual response is “it depends.” The answer isn’t a simple yes or no but is rather based on the type of credit inquiry you’re doing. Before we get into it though, it’s important to understand how each credit check works and its impact on your financial choices.
First, let’s quickly recap what elements make up your credit score. Think of your credit score as a pizza. Each slice represents a different component that adds to your score. The biggest slice of the pizza represents your available credit on the cards you currently have open. One medium sized slice of the pizza represents the length of your credit history and another medium sized slice represents your percentage of on-time payments. The final slice of the pizza represents any derogatory marks — such as bankruptcy or late payments — that you may have.
Want to learn more about your credit score? Check out our other awesome blog posts — 5 Reasons Why You Should Check Your Credit Score Regularly and Credit Score Ranges in Canada Explained.
Regardless if you’re checking your credit score to see if you’re in good shape to make a future investment or to apply for a credit card — it will all appear on your credit file. But they won’t both necessarily affect your score.
In this post, we’ll explain the follow concepts to help you better understand your own credit score:
- What is a credit inquiry?
- What is a soft credit inquiry?
- What is a hard credit inquiry?
- Other types of credit checks
- How does a hard credit inquiry affect your credit score?
- How to minimize the impact of a hard credit inquiry
- How to check your credit report in Canada
What is a credit inquiry?
An easy way to understand credit inquiries is to think of them as asking for a copy of your credit score. Anytime you apply for credit — whether it’s for a vehicle, mortgage or education — you’re giving the lender permission get a “copy” of your score from a credit bureau.
When a lender inquires about your credit score, it will remain on file, allowing you to see who’s checked your score. Most inquiries will stay on your score for a minimum of three years. In order not to lower your score, it’s important you only check it once a year with a free annual report from either Equifax or TransUnion.
Say you’re shopping around for a vehicle and approach multiple lenders to find the best loan for you. It’s okay to have all these prospective lenders check your score as long as it’s in a small time period. Credit bureaus are smart, and when they see multiple checks done within a few weeks, they understand you’re shopping around for the best rate.
With all this being said, not every inquiry — or copy of your credit report — will affect it. This is because there’s two kinds of inquiries: soft and hard.
What is a soft credit inquiry?
Soft inquiries — or “soft pulls” as some credit bureaus refer to them — occur when you or a business check your score as part of a background check. These inquiries never affect your credit score, though they usually do stay on your accounts history. As soft inquiries aren’t reflective of a credit application, they’re only visible to you when you go and check your score.
A few examples of soft inquiries include the following:
- A credit card issuer checking your credit without your permission to see if you qualify for a certain credit card offer
- A future employer running a check before hiring you
- “Pre qualified” insurance quotes
What is a hard credit inquiry?
On the other hand, hard inquiries — or “hard pulls” — is when you apply for a loan of some sort and the lender makes an inquiry to determine whether you can get approved. These stay on your credit score for an average of two years because it indicates to the credit bureau how “high risk” of a borrower you are. However, one to two hard inquiries annually will only affect your credit score by a few points (usually five or less).
A key factor to remember when it comes to hard inquiries is that they only happen when you have to authorize the loan. However, there are credit checks that can be either hard or soft, such as cable, internet and phone payments.
A few examples of hard inquiries include the following:
- Auto loan applications
- Mortgage applications
- Credit card applications
- Student loan applications
- Apartment rental applications
How does a hard credit inquiry affect your credit score?
The amount of points a credit inquiry takes off your credit score is based on several variables. If you have few accounts or a short credit history, it’s more likely each inquiry will be more impactful. Whereas if you have a long credit history and only one to three credit cards, you may not even noticed the effect of a hard inquiry.
Statistically speaking, anyone with six inquiries or more on their credit report can be up to eight times more likely to declare bankruptcy than those with zero inquiries. Ultimately, more inquiries also means more risk. With all that being said — yes, hard inquiries do affect your credit score but they’re not as crucial as the other parts of the “pizza.”
How to minimize the impact of a hard credit inquiry
You can’t stop a hard inquiry from impacting your credit score, but you can absolutely minimize the hit. Here’s a few ways you can do so:
Keep a Small Window when Price Comparing
Don’t let the idea of multiple lenders asking for a copy of your score scare you. We understand the importance of shopping around to find an interest rate that fits your lifestyle and encourage you to do so.
As we mentioned before, if inquiries are done within a certain time period, credit bureaus will often only count them as one. This method is also called “bunching.” It ultimately shows lenders you’re being smart with your money and not applying for multiple loans. For most bureaus, this time period is anywhere from 30 to 45 daysPick Credit Cards Wisely
2. Apply for Credit Cards Mindfully
When it comes to credit cards, you want to do your research before applying. Be selective in which ones you choose and don’t apply for multiple at one time. Each time you apply for a card, it appears on your credit score, so minimize the impact by limiting yourself.
3. Find Other Ways to Prove Your Financial Reliability
You don’t always need to use a credit card when it come to getting a loan or renting an apartment. There’s several circumstances when it isn’t mandatory for a lender to check your credit score. Say you’re interested in renting a home. Rather than having the landlord do a credit check, you could save up enough to pay them a few months rent in advance. You could also print out a copy of your monthly income or show them a pay stub.
How to check your credit report in Canada
In Canada, there are two national credit bureaus that you can use to check your credit score without it having any impact: Equifax Canada and TransUnion Canada. Both credit bureaus offer free and paid options.
For the free option, you’ll have to wait two to three weeks to receive your credit report. You’ll have to send in two pieces of identification and some basic background information. If you don’t have the time to wait for a free report, you can apply online and receive an instant report. This option offers more information too.
Additionally, many banks have begun offering free credit score checks — but check with your banker beforehand.
At Birchwood Credit, we can help you explore your options for getting into the driver’s seat of a Birchwood vehicle. We offer in-house financing, which means we offer auto finance loans on Birchwood vehicles with our own money. We won’t shop out your car loan application to lenders. Our goal is to get Manitobans into reliable vehicles, which is why Birchwood accepts applications from people with all different levels of credit and little-to-no credit history. Get started today!
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