What’s the difference between a soft search and a hard search on your credit report? 🤔 If it’s your first time applying for credit, you may want to know a thing or two about these types of searches. Let’s take a look at how these searches affect your credit score and ability to get credit. As you know, having a high credit score is important if you want to get approved for a loan or car finance. Let’s start by understanding why soft and hard searches are necessary for evaluating your loan application.
Why are Credit Checks Necessary?
Credit checks or credit searches are important, especially to financial institutions so they can understand a loan applicant’s behaviour when it comes to handling his or her finances. Whenever you apply for a loan, credit card, or car finance, expect that the lender will conduct a credit check on your credit report as part of their process before granting you credit.
The point of doing a credit search is so that the lender can check your past and current financial obligations and how you are managing them. If you’ve ever had late payments or you failed to pay a loan altogether, those will appear on your credit report and the lender will see them when they conduct a credit check.
Credit searches are not just for financial institutions like banks and car finance companies but they are also for you so you can check your own credit report and score. You can evaluate the information available there and see whether they are accurate before applying for a loan. You don’t have to worry about checking your own credit report because it won’t affect your credit score in the way that hard searches do.
What’s a Hard Search Anyway?
There are two types of credit checks: soft search and hard search. Let’s dive into what a hard search is first. This type of credit check happens when a lender, for example, makes a full and complete search of your credit report. Hard checks will be recorded on your credit report so if you’ve applied for a loan from numerous lenders, they will be able to see other lenders’ hard searches.
Hard checks are necessary when you’re applying for credit because the lender evaluates your suitability first before granting you a loan. They want to know whether you’re a low-risk or high-risk borrower and how responsible you were in paying off debts on time. Your past financial behaviour can affect the outcome of your present loan application, along with the interest rates that the lender will set for your loan.
Companies that perform hard checks are not limited to lenders and financial institutions. Mobile phone companies and utility providers may also conduct a hard check on your credit report. It’s important to remember that each hard check will stay on your credit report and can affect your credit score. It’s not advisable to make multiple applications within a short period because that can hurt your credit score and make you seem desperate for credit, which is a red flag for lenders.
How are Soft Searches Different?
Unlike hard searches, a soft search allows the viewer to see only certain details on your credit report. You can do a soft search on your own credit report before you apply for a loan so you can evaluate your chances of getting approved by the lender. You may conduct numerous soft checks and not worry about them appearing on your record. They won’t be visible to companies checking your report as well and won’t affect your credit score.
Soft searches also include companies checking your credit history as part of verifying your identity. For instance, employers may conduct a soft check on individuals applying for a job in their organisation. Another example is when you compare credit card offers or assess your eligibility using tools available on the websites of credit reference agencies. Soft searches can help you prepare for your loan applications without affecting your credit score negatively.
Tips on Soft and Hard Searches
- Make as few loan or credit applications as possible.
- Perform soft checks on your credit report to know your chances of getting approved for a loan.
- Only apply for credit which you are eligible for to minimise hard searches by numerous lenders.
- If you need to make a few credit applications such as for utilities and mobile phones, space them out to protect your credit score.
- Try to limit your credit applications to only one every three months or longer.
With soft and hard searches, you’d want to have as few hard checks on your credit report as possible. Make the most of soft searches because they won’t be recorded no matter how many times you conduct them. It would benefit you to do soft checks on your credit report first before applying for any type of credit because you’ll have the chance to assess whether you are eligible or not.