What Happens When Someone Checks Your Credit?
There are a lot of myths out there surrounding credit scores, especially when it comes to what happens when you or someone else check them. That’s why we’ve cooked up this little blog post to set the record straight.
We don’t know how much good it will do—the internet is pretty good at sustaining all sorts of “out there” legends—but we figured it doesn’t hurt to try. In that regard, it's actually a lot like checking your own credit score!
There are two types of credit checks: hard and soft.
When you apply for a personal loan, a mortgage, an auto loan, or a student loan, your lender is going to want to look over your credit report. In order to do this, they may need to run what’s called a “hard” inquiry on your credit report. This delivers them a full copy of your credit report, and it can only be run with your express permission.
Other times, a business might want to access your credit report for a more general purpose, like renting you an apartment or “pre-approving” you for a credit card offer. In cases like this, a business would run what’s called a “soft” inquiry. Unlike hard inquiries, these soft credit checks can be run without your permission—or even your knowledge.
One of the biggest differences between hard and soft credit checks is how they affect your credit score. Hard inquiries are recorded on your credit report under the “recent credit inquiries” category, and they do affect your score. Depending on your credit, a single hard inquiry can ding your score by five points, and multiple inquiries in a short amount of time can have a larger effect.
Meanwhile, soft credit checks are also recorded on your report, but they will only be visible to you. And they have zero effect on your credit score.
Soft credit checks also apply when you check your own credit score or request a copy of your credit report—the latter of which you can do for free, by the way. It’s the law: All three credit bureaus must provide you with one free copy of your report annually upon request. To order a free copy of your report, just visit AnnualCreditReport.com.
Why do hard inquiries affect your credit score?
To explain why hard credit inquiries affect your credit score, it helps to think like a lender:
You receive an application for an unsecured personal loan, and you pull up a copy of this applicant’s credit report. You notice that, recently, they’ve been applying for a number of different personal loans and credit cards. What does that say to you?
For many lenders, a large number of recent credit inquiries points to one thing: A borrower who is desperate for more credit, which means that they have probably encountered some additional costs that need covering. And when a person is struggling with added costs—including extra debt—that means that they are somewhat less likely to pay back a new loan.
However, there is one pretty obvious exception to this rule: shopping around! In order to find the best loan possible, it helps to apply for a bunch of different ones. It’s only once your loan application is approved that you’ll see the terms these lenders are actually offering you.
Shopping around for the best loan is smart financial behavior and something to be encouraged. That’s why, when it comes to mortgages, auto loans, and student loans, any inquiries made within the same 45 day period are bundled together on your credit report and are counted as only a single hard inquiry.
The benefits of soft credit check loans.
For people with bad credit, a hard inquiry on an in-person or online loan application might as well be a “No Trespassing” sign. That’s why many of them end up borrowing no credit check loans that don’t perform any hard inquiries—and come with much higher interest rates to compensate. (For all the details on no credit check loans, check out the OppU Ultimate Guide to No Credit Check Loans.)
And while some of these loans can provide a sensible short-term financial solution, there is a big difference between checking a person’s credit score and checking their ability to repay, period. That’s why many bad credit lenders perform a soft credit check, one that won’t affect an applicant's credit but that still gives them a better idea of what this person can handle financially.