Bank Better, Live Better
credit enquiries affect your credit score04/05/2017
Understand the difference between hard and soft enquiries and how they could have an impact on your credit score.
Credit profile versus credit score
Your credit profile is kept on record by a credit reporting company, called a credit bureau. It contains information that is reported and updated by companies who have given you credit. When you apply for credit, such as a new credit card, the financial institution or lender will ask for your credit profile from the credit bureau.
In addition to looking at your credit profile, many lenders use a credit score to determine whether you will repay your loan. Lenders have been using credit scores as part of the lending-decision process for over 20 years, and a higher credit score will improve your chances of being approved for the financial products you want, at the best terms and interest rates.
Your credit score changes based on several factors, such as when you pay your bills and how many loans you have. For example, if you pay your bills on time, your payment history will reflect your good payment habits, boosting your credit score.
Your credit score is available to companies and financial institutions, and makes it easier for you to obtain credit in the future.
Soft enquiries versus hard enquiries
Whenever information on your credit profile is requested, it’s called an enquiry and gets categorised as either a soft or a hard enquiry.
Soft enquiries typically happen when a person or company checks your credit profile as part of a background check. This does not affect your credit score. Soft enquiries may occur without you even knowing and can be done without your permission.
For example, a soft enquiry could come from a credit card company that pre-approves you for a card offer. Other reasons for a soft enquiry may include a credit and criminal check by a potential employer, or from an insurance company. Checking your own credit report is also a soft enquiry.
Hard enquiries mainly occur when a financial institution checks your credit report when making a lending decision. This takes place when you apply for a loan, credit card or home loan. A hard enquiry can only take place with your authorisation. It's important to know that hard inquiries might lower your credit score, and they can remain on your credit profile for 2 years.
A hard enquiry can damage your credit score if you apply for credit too many times in a short time-frame. This indicates to the lender that you may be applying for credit you can’t afford, or someone could be attempting fraud. However, the exception is if you're shopping for the best rates on a specific loan, such as a home loan or motor vehicle finance.
- Check your own credit score. You can request one free credit report per year from a credit bureau
- Before applying for credit take measures to build your credit score and history
- Switch to debit orders to ensure that your bills are always paid on time
- Limit your hard enquiries to one or 2 a year
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