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Does a Credit Check Affect your Credit Score?

Credit checks are at the heart of applying for credit. Make sure you understand them.

15 August 2023Lloyd Smith 6 min read
Understanding credit checks Credit checks are at the heart of applying for credit. Make sure you understand them

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If you have applied for a credit application or checked your own credit report, chances are, you have probably already experienced a credit check.

Credit inquiries or checks are necessary for lenders to gauge your creditworthiness. They can also help you understand your current financial situation so that you can apply for new credit products accordingly.

But does a credit check affect your credit score? Let's find out.

A credit check or a credit inquiry is essentially a search that is run to look into the information present in your credit report with the goal of better understanding your financial behaviour.

When you apply for a big financial commitment like a credit card, loan, utility service, or a lease, the lender will first check your credit report to decide whether you are the right applicant or not. This in turn allows them to pull credit reports from any of the major credit bureaus.

While these organisations or companies don’t always need your consent to ask the credit bureau to see your credit report, they do need a legitimate reason to do so, always.

Organisations that can conduct credit checks on you for several reasons, include:

  • Banks
  • Credit card providers
  • Financial institutions
  • Utilities suppliers
  • Employers
  • Landlords

As part of the credit check, they can look into whether you have paid back the previous or existing line of credit issued to you, how much credit you already have with you, and how well you are managing it. They may also look into any financial associations if you have any joint accounts or loans.

A soft check or a soft inquiry occurs when you check your own credit report or when a credit card issuer/ financial institution checks your credit score without your prior permission just to see if you qualify for any pre-existing offers.

For instance, if you see any pre-approved loan offers available to you by your bank, they are evaluated by conducting a soft check to see your credit score and recent credit history.

Unlike hard checks, soft checks do not affect your credit score in any way. Since the soft checks are not connected to a specific application for a new line of credit, they are only visible to you when you view your credit reports.

Also known as hard inquiries, hard checks occur when a bank, lender, or a credit card provider specifically checks your credit score before they can make a lending decision.

For instance, a hard check can be initiated for your credit report when you apply for a new loan, mortgage, credit card, and even if you are trying to lease a new apartment. Essentially, you send out the application and authorise these hard checks.

Some of the examples where hard checks are conducted on your credit reports include:

  • Loan applications for personal loans, student loans, auto loans, and mortgages
  • Credit card applications
  • Rental applications for leasing a new house
  • Job applications
  • Request to increase an existing line of credit

Hard credit checks can stay on your credit report for up to 5 years. While a few hard checks may have absolutely no effect on your credit score, multiple hard checks in a small span of time can lower your score by a few points or more.

The damage done to your credit score usually disappears as the hard check gets dropped from your credit report. Although this can take a few years depending on the type of hard check that was generated.

That means, if you are applying for too many credit applications in a short period of time and getting rejected, it could have a significant impact on your credit scores. Multiple hard inquiries all at once can make credit card providers and lenders to assume that you are a high risk applicant. It can suggest that you may be short on cash or probably racking up on a lot of debt.

Therefore, it is always advisable to avoid applying for multiple loans or credit cards all at the same time. Moreover, you should also read through the eligibility requirements for every new credit application. It's best to apply for only those credit products that you are confident about getting approval for.

ClearScore provides you with a free credit score check that you can use to not just check your score but also check any soft or hard inquiries that have been run against your credit file.

After you sign up on ClearScore, your credit reports are directly shared with you along with personalised insights about your credit score.

Here’s how you can get free credit reports with ClearScore:

  • Sign up and create an account on ClearScore by entering your email address
  • Add your personal information including your name, date of birth, and address
  • Verify your identity by providing more information like your driver’s license number, passport number, or medicare number
  • Get access to your credit report and details about the recent credit checks

The biggest difference between a hard check and a soft check is that a hard credit check ends up leaving a very visible footprint on your credit report which your future lenders and even employers can see.

While hard checks don’t mention whether your credit application was approved or rejected, too many hard checks in a short period of time are a clear indication that you were in the market for a new line for credit and constant rejection made you apply to other lenders.

It can signal lenders and credit providers that you may be struggling with finances and finding it difficult to get a new credit product.

There are many factors apart from credit inquiries that can affect your credit score including your previous payment history, outstanding debt, and bankruptcies. Even defaults can affect your credit score severely.

In fact, credit inquiries that stay on your credit report can only impact up to 10 percent of your total credit score. Whereas, payment history can affect over 35 percent of your total credit score. As a result, it is just as essential to understand how your credit score is calculated.

Multiple hard checks in a short period of time can affect your credit score by over 5-10 points. Although when these hard inquiries are dropped off eventually after a year or two, your credit report gets updated and your score goes back to what it was before all the inquiries.

On an average, hard inquiries can stay on your credit report in Australia for over two years. In case you see any discrepancies in your credit file or find any inquiries that should have never existed there in the first place, you can claim against them with the credit bureau and get the inquiry taken off of your file, if your claim is proven to be true.

Don’t apply for multiple credit applications together

Applying for multiple loans or credit cards all together can severely hurt your score, especially if you don’t have a good enough score to be approved for all of them. That is why, it's important you keep a gap of 30-90 days before applying for different credit products.

At the same time, you should do your research before applying. Go through the eligibility criteria for each credit application and estimate how likely you are to get approved. If your current credit history and score are way off and do not align with the eligibility criteria of the credit product you want to apply for, it's best to not apply for it at all.

Adopt healthy credit habits

Always focus on adopting healthy credit habits in order to build your score. You should make repayments on time before the deadlines, maintain an optimum credit utilisation ratio, and avoid going over your credit limit at all times.

Regularly check your credit score

Checking your credit report regularly should always be a part of your monthly routine. Keeping an eye on your credit file allows you to clearly see how credit checks affect your credit score. You can also look out for any possible errors on your file that might invariably be affecting your score.

Credit checks can quickly become a big challenge especially if you have raked up too many hard checks and you have been trying to build your credit score.

That is why you should check your free credit report on a routine basis and review all the recent inquiries that have been made.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.