Do Credit Checks Hurt Your Credit Score?

There are multiple factors that impact your credit score – credit utilization rate, how often you make payments on time and in full, and the overall length of your credit history – these are all things that determine where your score will fall between the 300-850 credit scoring system. However, another big piece that determines the health of your overall credit score is how many marks are documented in your report. In fact, 10 percent of your credit score is based on the inquiries that lenders make to your file.

As an auto financing company, we often get questions regarding lender inquiries and how they can potentially impact your score. There are two types of inquiries that exist – soft inquiries, also called “soft pulls”, and hard inquiries, or “hard pulls”. Lenders will base approval rates for a loan on the applicant’s financial history. The first step before applying for a loan, whether it be a credit card, an auto loan, personal loan, or a mortgage, is to understand what exactly soft credit pulls and hard credit pulls mean, and how they can both play a vital role in assessing your overall credit score.

How Hard Credit Inquiries Impact Your Credit Score

A hard credit inquiry occurs when you apply for a loan and authorization is required by a lender to see if you’re eligible for approval. Common examples of hard credit inquiries are mortgage applications, auto loans, credit cards, student loans, personal loans and apartment rental applications. When someone applies for a loan that requires a hard pull, one single hard inquiry won’t typically impact your credit score negatively. However, if you have a lot of individual hard pulls recorded on your credit file (i.e. if you apply for multiple different credit cards at once), this could lower your score. The reason why hard credit checks impact your credit score is that credit bureaus assume that if you’re applying for a lot of additional credit within a short period of time, you’re in a tight financial situation that could put you at a greater risk of not paying your debt back. Lenders need to see how responsible you are with your finances, which means they must pull your file to view your credit history before they can approve you.

Credit scoring models typically count auto loan inquiries made over a 45-day period as one inquiry. This method of applying for credit within a specific time frame, otherwise known as “bunching”, will show creditors that you’re shopping smart and not applying for loans irresponsibly. Given that credit inquiries stay on your report for 2 years, it’s crucial to apply for credit only when you absolutely need it so that when lenders do a hard check, they see a report that reflects good financial sense and not credit abuse. A high number of hard inquiries on your file is associated with elevated risk. Not to mention, a high volume of hard checks on a file often means subpar interest rates.

How Soft Credit Inquiries Impact Your Credit Score

Soft credit inquiries occur when a lender checks your credit report for informational purposes. This type of credit check doesn’t impact your credit score and won’t show up on your credit report to other lenders. Soft pulls typically happen when an employer does a background check, if you’re pre-qualified for a credit card, or if your financial institution looks at your credit report to determine your overall financial health. Unlike hard credit checks, soft pulls won’t impact your score because you haven’t applied for a loan. Additionally, when you view your credit report from one of Canada’s major credit bureaus, this is also considered a soft inquiry as you’re not authorizing a lender after applying for a loan. Often, soft credit checks happen without your request, which means you’re never penalized when it comes to soft credit inquiries.

It’s a good idea to request a copy of your credit report before you apply for loans. Viewing your personal report before a lender does will give you a good idea on what to expect for approval rates and terms. Alongside this, actively checking your credit report is a good way to prevent the risk of any fraudulent activity on your report. If you notice any hard pulls on your credit report that you didn’t authorize, we suggest contacting your financial institution and the credit bureaus to dispute the claim. Lenders consider all hard pulls on a person’s credit report before deciding whether or not the applicant is responsible enough to take on another loan. To increase your chances of getting approved at a great rate, work on re-establishing your credit by ensuring all of your bills are paid on time, keeping debt balances low, and only applying for credit when you absolutely need it.

Canada Drives works with hundreds of Canadians every day, ensuring they get quality vehicles with ease and simplicity, regardless of their credit score. Getting approved for auto financing with bad credit can take several days, and even weeks, but Canada Drives’ dealer partners work hard to get applicants the best vehicle and financing options fast. If you need an affordable vehicle and want to rebuild your credit, apply with Canada Drives for free today and learn more!