Do Credit Checks Hurt Your Credit Score and by how Much?

There are multiple factors that impact your credit score – credit utilization rate, payment history, the overall length of your credit history, and public records all help determine where your score will fall between the 300-900 credit scoring system.

However, another important piece that determines the health of your credit score relates to how frequently your credit report gets pulled by lenders. Ten percent of your credit score is based on the requests (or inquiries) that lenders make to the credit bureaus to see your credit report. 

Inquiries account for 10% of your credit score according to the Equifax credit bureau

Lending institutions need to ensure that you’re a trustworthy borrower. Therefore, they need to view your loan history to determine whether or not to approve you. Your loan history is compiled and summarized in your credit report. This report will also contain your credit score.

There are two types of inquiries: hard credit inquiries (aka "hard pulls") and soft credit inquiries (AKA "soft pulls".)

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. This type of credit check will show up in your credit report, but there are special allowances that permit rate shopping (see "bunching" below). 

A soft credit inquiry occurs 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.

How hard credit inquiries impact your credit score in Canada

A hard credit inquiry occurs when you apply for a loan and authorization is required for a lender to check your loan eligibility. 

Lenders need to see how responsible you are with your finances, which means they must pull your report to view your credit history before they can approve you. 

Common examples of hard credit inquiries include: 

• Mortgage applications
• Auto finance applications
• Credit cards
• Student loans
• Personal loans 

If you apply for multiple different types of loans, several inquiries on your report within a short period of time could impact your credit score as it indicates that you may be financially squeezed. Credit bureaus tend to view you as a greater risk of not paying your debt back. That's why it's important to apply for credit sparingly and with lending institutions that are likely to approve you.

Bunch inquiries to mitigate impact

When it comes to making numerous applications over a short period of time, there is an exception. If you’re shopping for a specific type of loan, multiple inquiries will only count as one inquiry.

For example, if you’re shopping for a car and comparing the auto loan rates of different lenders, each lender will make a separate inquiry. But because all inquiries are for the same type of loan, they will only count as one inquiry as long as all applications are made within a 45-day period. 

This “bunching” method of applying for credit within a specific timeframe indicates that you’re shopping smart and not applying for loans irresponsibly.

How long does a hard inquiry last on my credit report? 

Every hard credit inquiry might knock a few points off your credit score, and while it only affects your credit score for up to 12 months, it could stay on your report for up to three years. 

If you apply for various types of loans (i.e. a personal loan, credit card, mortgage, and auto loan) within a few days of each other, multiple hard inquiries over a short time period will elevate the perception of risk for the lender, which can lead to a lower credit score and potentially higher interest rates.

Therefore, you should only apply for credit when you need it, and make sure that when lenders do a hard pull, they see a report that reflects good financial sense and not credit abuse.

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. 

Common examples of soft credit inquiries include: 

• An employer does a background check 
• You apply for insurance
• You get pre-qualified for a car loan or credit card

Unlike hard credit checks, soft pulls won’t impact your score because you haven’t specifically applied for new credit. You’re never penalized when it comes to soft credit inquiries.

Additionally, when you download your own credit report from one of Canada’s major credit bureaus (Equifax or TransUnion), it is considered a soft inquiry as you’re not submitting a specific loan application.

Check your credit report and credit score for free

It’s a good idea to know your credit score before you apply for loans. Monitoring your credit report will give you a good idea of what to expect in terms of approval rates.

Furthermore, 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. 

If you’re worried about your credit score, you can download and monitor your credit report for free at Borrowell. 

Checking your credit score with Borrowell won’t impact it, and you'll get free credit improvement tips and education to help you become an expert in all-things credit-related. So sign up in three minutes and take control of your finances!