There are all sorts of reasons you might need to apply for credit at some point in your life. Hopefully it will be for a positive reason, to make paying for household items in your new home a lot easier for example, but at other times you might need it help cover any emergency payments, such as if your car requires some immediate and unexpected repairs.
I’ve had to apply for credit in the past for such a reason and having never done so before thought it would be quite complex. Thankfully it wasn’t too bad, but one thing I learnt was the importance of your credit score and the differences between hard and soft searches.
What’s a Credit Score?
A credit score or rating is used by lenders to help them make a decision about whether you will qualify to borrow money. This could be for a credit card, mortgage or other financial service. There is no universal credit score for each person, the lender will use information supplied as part of an application to work out a score based on your credit history. It gives a good idea of how likely you are to meet repayments, with those given a higher credit score seen as lower risk.
When your credit is checked, it will be categorised as either a hard or soft search (or inquiry). Both of these can impact upon your credit score, so it’s important to understand the difference before applying for credit in the future.
Hard credit searches or checks happen when a lender checks your credit report when applying for a credit card, mortgage or a loan usually. In most cases you will have to authorise a hard credit check to take place, as it could have a negative impact on your score. It’s unlikely that undergoing one hard credit check will change whether you’re accepted for finance or not, but most hard searches will stay on your report for 12 months.
As long as you borrow responsibly then the impact will only be short term. However, if you make many credit applications in a short space of time, this is what can have a negative impact as they will appear to anyone viewing your credit report. It could signal that you are desperate and struggling to get credit, making you appear riskier to lenders. Therefore, it’s advisable to space out your applications if your first couple are unsuccessful.
A soft credit search is something of a preliminary credit check and won’t impact upon your score at all. These don’t require permission from the lender as they won’t be able to see all of your credit report information. While they will stay on your credit report for 12 months, only you can see them and not any other potential lenders.
The main reasons for soft searches are if you check your own report, when it’s accessed for an identity check or if a lender wants to see if you’re eligible for a new financial product. So, these aren’t something you have to worry too much about.
It’s a good idea to undergo soft checks yourself regularly to spot any potential errors, while reducing the amount of hard checks if possible.
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