When it comes to checking your credit, there are two types of credit pulls (or checks): hard and soft. Understanding the difference between the two is important, as it can impact your credit score and financial health in Canada.
Let’s imagine you’re looking to buy a new car. You’ve done your research, visited multiple dealerships, and finally found the perfect vehicle. Excited, you head to the dealership and fill out the necessary paperwork to apply for financing. Little did you know, by doing so, the dealership performed a hard credit pull without your knowledge.
Fast forward a few days later, you receive a call from a representative at a different dealership, asking if you’re still in the market for a car. You’re puzzled because you never provided your information to them. This unexpected call raises red flags, and you decide to investigate.
You pull up your credit report and notice multiple inquiries from various car dealerships. It becomes evident that these inquiries were made without your consent. Your heart sinks, as you realize that your personal information may have been compromised. Concerned about the impact on your credit score and financial well-being, you reach out to the credit bureaus, as well as local authorities, to report the unauthorized inquiries.
This anecdote illustrates the importance of understanding the different types of credit pulls and their implications. Had the dealerships performed soft credit checks instead of hard inquiries, your credit score would not have been affected, and you would have been spared the potentially harmful consequences of an unauthorized inquiry.
In the upcoming sections, we’ll delve deeper into the differences between hard and soft credit pulls, how they affect your credit score, and what steps you can take to protect your financial health in Canada.
What Is a Credit Inquiry and How Does It Work?
A credit inquiry, also known as a credit check, occurs when someone requests and receives your credit information. This can happen when you apply for new credit, such as a loan or credit card. The credit inquiry is made to one of the three credit bureaus (Equifax, TransUnion, and Experian), who then share your credit report with the requesting party if they have a legal right to access it. Credit inquiries are recorded in your credit file and can stay on your credit report for up to two years. It’s important to note that a credit freeze can prevent unauthorized access to your credit information.
Note about Experian
Experian, one of the major global credit reporting agencies, does not operate a consumer credit bureau in Canada. In Canada, the primary credit reporting agencies are Equifax and TransUnion. These two organizations collect and analyze credit information, produce credit reports, and calculate credit scores for Canadian consumers.
Experian does have a presence in Canada, but its services are focused on business credit and analytics, providing services to organizations rather than directly involving consumer credit reporting like Equifax and TransUnion do. So, if you’re seeking to check your personal credit report or score in Canada, you would typically interact with either Equifax or TransUnion.
Hard Credit Check: How It Affects Your Credit Scores
A hard credit check, also known as a hard inquiry, occurs when you apply for new credit, such as a loan or credit card. This type of credit check is usually initiated by lenders and other companies to assess your creditworthiness before extending credit to you.
When a hard credit check is performed, it is recorded on your credit report, which lists your credit history and other relevant information. It’s important to note that hard inquiries can have an impact on your credit score.
Multiple hard inquiries within a short period can signal to lenders that you may be taking on too much credit, which can be seen as an increased credit risk. This is because statistics show that consumers with a higher number of recent credit inquiries are more likely to become delinquent on their credit obligations.
While a single hard inquiry may not have a significant impact on your credit score, it is important to be mindful of your credit card utilization and overall credit risk. Lenders and other companies use credit scores to assess your creditworthiness, and a higher level of credit risk can affect their willingness to do business with you.
It’s important to note that the impact of a hard inquiry on your credit score decreases over time. As you demonstrate responsible credit behaviour and maintain a positive credit history, the effect of previous hard inquiries will diminish.
“Hard credit checks can indicate a higher credit risk, but the impact of a single hard inquiry on your credit score is generally minimal and decreases over time.”
It is recommended to be selective and strategic when applying for new credit to minimize the number of hard inquiries on your credit report. Before applying for credit, it may be beneficial to research and compare different options to find the best fit for your financial needs.
By understanding how hard credit checks can affect your credit scores, you can make informed decisions about your credit and work towards maintaining a healthy financial profile.
Soft Credit Check: No Impact on Your Credit Score
A soft credit check is a type of credit inquiry that does not have any impact on your credit score. It is commonly used for personal credit checks, pre-approved credit offers, insurance applications, and account reviews by your existing creditors. Unlike hard credit checks, soft credit inquiries do not show up on credit reports pulled by lenders or other companies, and they do not affect your credit score.
Soft credit checks are typically visible only on consumer disclosures, which are credit reports that you specifically request for your personal use. These inquiries are not shared with potential lenders or creditors, and they do not have any bearing on your creditworthiness or financial health. As a result, you can safely monitor your credit using soft credit checks without worrying about negative impacts on your credit score.
Here are some common uses of soft credit checks:
- Personal credit checks for informational purposes
- Pre-approved credit offers
- Insurance applications
- Account reviews by existing creditors
Soft credit checks provide a convenient way to keep an eye on your credit without any negative consequences. By regularly reviewing your credit through soft credit inquiries, you can stay informed about your credit standing and address any potential errors or discrepancies in your credit report.
Duration and Impact of Hard Inquiries on Your Credit
When it comes to hard inquiries on your credit, it’s important to understand their duration and impact. According to the Fair Credit Reporting Act, hard inquiries typically stay on your credit report for two years. However, their impact on your credit score diminishes over time.
Credit scoring models take into account the number of hard inquiries and their age, along with other factors such as payment history and credit card utilization. While a single hard inquiry may have a small impact on your credit score, it is generally considered to influence 10% of the credit score by FICO and 5% by VantageScore.
Individuals with limited credit history tend to be more affected by hard inquiries compared to those with established credit reports. It’s important to note that the impact of hard inquiries on your credit score decreases over time as they age.
Exceptions to the Impact of Hard Inquiries
When it comes to applying for loans, such as mortgages, rate shopping allows you to explore multiple options and find the best interest rates. The good news is that this process is considered an exception to the impact of hard inquiries on your credit score.
FICO and VantageScore credit scoring models have a special logic called deduplication, which treats multiple inquiries for the same type of loan as a single inquiry. Let’s say you are comparing mortgage rates and decide to apply with multiple lenders within a specific timeframe. In this case, these inquiries will typically be treated as one inquiry on your credit report.
This exception gives you the freedom to shop around for the best loan terms without significantly impacting your credit score. It allows you to make informed decisions and find a loan that suits your needs and financial situation.
Also Read:
- How Do Credit Scores Work
- How Do Credit Cards Work
- Credit Card Rewards. Who Pays?
- Credit Score and Your Mortgage
- Hard vs Soft Credit Pull
Unauthorized Inquiries: Protecting Your Credit
Protecting your credit is essential, and one way to do that is by monitoring your credit reports for unauthorized inquiries. Unauthorized inquiries can be a red flag for potential fraud or identity theft, so it’s crucial to stay vigilant and take action if you spot any suspicious activity.
In Canada, the legislation that governs the use and reporting of credit information is primarily the Personal Information Protection and Electronic Documents Act (PIPEDA). PIPEDA is a federal privacy law that regulates how private sector organizations collect, use, and disclose personal information in the course of commercial business. Under this act, consumers have the right to access and correct their personal information held by credit reporting agencies.
Key Provisions of PIPEDA Related to Credit Reporting:
- Consent: Organizations must obtain an individual’s consent when they collect, use, or disclose that individual’s personal information, except in certain circumstances.
- Accuracy: Personal information must be accurate, complete, and up-to-date, which is crucial for credit reporting agencies to ensure fair credit reports.
- Access: Individuals have the right to access personal information held about them by an organization and can challenge the accuracy and completeness of the information.
- Accountability: Organizations are required to be open about their policies and practices with respect to the management of personal information and must ensure that personal information is protected adequately.
Other Relevant Provincial Legislation:
Some provinces in Canada have their own credit reporting laws that complement or, in some cases, supersede PIPEDA for transactions within those provinces. For example:
- Ontario: Consumer Reporting Act
- Alberta: Fair Trading Act
- British Columbia: Business Practices and Consumer Protection Act
- Quebec: Act Respecting the Protection of Personal Information in the Private Sector
These provincial laws are particularly significant because they provide specific guidelines and rules about the operation of credit reporting agencies within their jurisdictions, often adding additional protections or clarifications beyond what PIPEDA provides.
Understanding these laws is crucial for consumers and businesses alike to ensure compliance and protect personal information within the framework of Canadian credit reporting.
If you come across unauthorized inquiries on your credit report, it’s important to investigate further to determine if you are a victim of fraud or identity theft. Contact the credit bureaus as soon as possible to report the unauthorized activity and take the necessary steps to protect your identity and credit.
Monitoring your credit reports regularly can help you identify unauthorized inquiries early on and mitigate the potential damage. By staying proactive and attentive to your credit, you can safeguard your financial well-being and maintain a strong credit profile.
Conclusion
Understanding the difference between hard and soft credit pulls is essential for managing your credit effectively in Canada. While hard credit checks may have a minor impact on your credit scores, soft credit checks do not affect your credit score at all. It’s important to be mindful of the frequency and purpose of credit inquiries to maintain a healthy credit profile. Regularly checking your credit reports and reviewing them for accuracy can help you stay informed about your credit standing and detect any unauthorized activity.
By staying informed and responsible with your credit, you can work towards maintaining or improving your credit score, and ultimately, your financial health.
FAQ
What is the difference between a hard credit pull and a soft credit pull?
A hard credit pull occurs when you apply for new credit and can potentially lower your credit score. A soft credit pull, on the other hand, does not affect your credit score and is often used for pre-approvals or personal credit checks.
What is a credit inquiry?
A credit inquiry, also known as a credit check, occurs when someone requests and receives your credit information. This typically happens when you apply for new credit, such as a loan or credit card.
How does a hard credit check impact my credit scores?
A hard credit check, which is typically done when you apply for new credit, can potentially lower your credit score. It indicates a higher credit risk to lenders and can impact your creditworthiness.
Do soft credit checks affect my credit score?
No, soft credit checks have no impact on your credit score. They are often used for personal credit checks, pre-approvals, insurance applications, and account reviews by current creditors.
How long do hard inquiries stay on my credit report?
Hard inquiries typically stay on your credit report for two years. However, their impact on your credit score diminishes over time.
Are there any exceptions to the impact of hard inquiries?
Yes, rate shopping for certain types of loans, such as mortgages, within a specific timeframe is considered an exception. Multiple inquiries for the same type of loan within a short period are often treated as a single inquiry.
How can I protect my credit from unauthorized inquiries?
Regularly reviewing your credit reports can help you monitor for unauthorized inquiries that may indicate fraud or identity theft. If you discover any suspicious inquiries, you have the right to dispute them with the credit bureaus.
Why is it important to understand the difference between hard and soft credit pulls?
Understanding the difference between hard and soft credit pulls is crucial for managing your credit effectively. It helps you make informed decisions about credit applications and monitoring your credit without negatively impacting your credit score.
