When you think about credit checks you most likely are thinking about getting a Hard Credit Check. What is it though and what should you know about them?
Keep reading to find out.
What are Hard Credit Checks?
A hard credit check is a comprehensive credit report that occurs when you put in an credit application to buy a major purchase. This is usually for a getting a mortgage on a home or property. Also perhaps buying a new or used car.
Hard credit checks inquiries provide lenders with a detailed financial picture of how "Credit Worthy" you as a consumer are. This basically means how likely are to pay them back.
This credit check helps banks, credit unions, mortgage lenders, auto lenders, etc. determine your ability to manage debt and pay them back on a consistent basis.
How do Hard Credit Checks work?
Hard credit checks take a complete overview of your credit history and credit report. Compared to soft credit checks they are much more involved in the data and history they provide.
Hard credit checks also lower your credit score when they run. At least temporarily. What most people tend to worry about when they know they are getting credit checked.
| Check Type | Purpose | Credit Score Impact | Authorization Required |
|---|---|---|---|
| Soft Check | Preliminary screening | None | Not always |
| Hard Check | Formal credit evaluation | Temporary reduction | Yes |
Keep in mind you give your explicit authorization to run a hard credit check. The reason being it will lower your credit score for a period of time. Always consider whether you should run your credit or not.
What is in a Credit Report?
When you credit is checked and the lender can you see your credit report, you might be wondering what is included in there? This is what the lender is going to see about your credit history.
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- Payment history - This shows how often you have made on-time payments on debt you owe.
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- Credit utilization - How much of available credit you are using.
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- Credit history - Going to show how long you have been using and borrowing money.
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- Total debt - What is the total amount of debt you currently owe.
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- Credit inquiries - The lender will see how many recent credit inquires you have had. How hard inquires will hurt a credit score.
Understanding all these checks helps you manage your financial planning better and you can anticipate potential lending decisions if you know what they look for.
When will you need to authorize a Hard Check?
You'll encounter hard credit checks typically when are;
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- Apply for a mortgage
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- Applying for a credit card
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- Applying for a personal loan
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- Applying for an auto or vehicle loan
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- Applying to borrow money for college or school
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- Applying for an apartment and home rental background screenings
Sometimes these are soft credit checks, which do not affect credit score. It depends on the situation and where you are in the process.
We recommend you ask and make sure you understand when a soft credit check vs hard credit check is happening on your credit report.
How much will it hurt my Credit Score?
Hard checks are tied to credit applications and remain on your credit report. Soft credit checks fall off after 1-2 years. So it's important to remember this before you give your express permission and a lender run your hard credit.
Hard credit checks can reduce your credit score by 5-10 points typically. However, it will vary and there is no way to know for sure by how much it will lower it.
Multiple checks within a short period signal potential financial instability to credit scoring models. The financial industry believes if you need you credit checked more often, the more risky you are going to be.
The less you check your credit, the more financially stable. I recommend spacing credit applications to minimize potential credit score fluctuations.
Buy Now Pay Later and Credit Checks
What do credit checks have to do with BNPL lending? A lot actually.
When you are attempting to use a major BNPL lenders they are going to run soft credit checks before lending you money. Even for seemingly small purchases such as $50 or $100 dollars.
I've read on Reddit of some people getting hard credit checked before they were leant to. In these cases they were financing more money, thousands of dollars, over a longer period of time.
Credit checks, specifically soft credit, is important for BNPL companies for evaluating short term lending to consumers. These checks happen millions of times a month since BNPL services lend so much.