The Differences Between a Soft and Hard Credit Check, and How to Enhance Your Credit

What's the difference between a soft and hard credit check

There are numerous times during your life when an organisation will be compelled to assess your credit rating in a bid to better understand your capacity to pay for something. There are two key types of credit checks – soft and hard – and though they are somewhat similar, there are some differences that you should be aware of.

However, before we get into that, it’s important to have a firm understanding of what a credit check is, when one is likely to be used, and what the potential associated outcomes could be.

What Is a Credit Check?

A credit check – sometimes known as a credit search or credit inquiry – takes place when a company needs to assess your past financial behaviour (and predict your future behaviour). The company will not always need to ask for your direct permission in order to do this – though some may ask – but they cannot perform a search just because they are curious; they must have a legitimate reason that they can justify.

There are any number of companies or organisations that frequently carry out credit searches, and they include:

– Banks
– Mobile phone contractors
– Housing agencies, letting agents and landlords
– Water, gas and electricity suppliers
– Loan companies

The primary goal of these searches is for an organisation to understand how you have behaved in the past when it comes to paying back loans or paying bills on time. They will also want to know what your current status is with regard to taking out credit, how much you have left to pay off, and whether you have any shared bank accounts. Should you have any shared accounts, and if the company deems these to be in any way relevant, then the secondary individual’s accounts are also liable to be checked.

It is possible for you to check your own credit score whenever you so please, and it should absolutely be noted that no matter how many times you look at it, such searches will in no way negatively impact your overall credit score.

It is possible for you to check your own credit score whenever you so please

Things You Need to Know (But Aren’t Always Obvious)

Credit checks are important. They happen all the time, often without us being aware, and are routinely crucial when it comes to dictating what we can and cannot do. However, there are a number of misconceptions and myths concerning credit checks, and so it is therefore vital you are clued up on the ins, the outs, and everything in between.

– There is absolutely no such thing as a credit blacklist. Some people seem to believe that there is a universal list that notes down people who should, under no circumstances, be given credit or a mortgage. This is not the case. Every lender will have its own set of criteria and will set its own level of risk when it comes to contemplating who it will regard as a customer. While it is true that, should your credit rating be poor, you may be turned down by numerous lenders, it is by no means certain that you will be unable to obtain a loan somewhere else.

– The purpose of a credit check is, quite simply, to try and predict how you are likely to act in the future. A lender is far more likely to consider you a viable option if you have an extensive history of being good with money, and so building a credit score should begin as early as possible.

– A credit check can give companies a comprehensive overview of your financial history and status, but there are numerous aspects of your life that it will not highlight, nor is it capable of highlighting. It doesn’t show medical records, for example, nor will it show criminal convictions, any information related to the CSA, how much money you have stashed in savings accounts, your race, ethnicity or sexual orientation, previous parking fines, or whether you’re in arrears with regard to paying council tax.

– Before making any application for credit, it is worth checking your credit score personally. If it is not especially good, then you may be able to improve it relatively quickly by making a few changes or by carrying out some simple administrative actions. We have listed a number of effective ways to improve your credit score at the bottom of this article.

What Exactly Is Displayed As Part of a Credit Search?

There are a number of things that an organisation will be able to see when they perform a credit check against your name. The primary things that will be displayed are as follows:

– Your full name, where you were born and your exact age.

– Where you are currently living and all of your previous residences. It may seem like an obvious point, but you absolutely should not apply for credit using any address other than your own.

– Your status with regard to the electoral roll. If you are NOT on the electoral roll, your credit score is likely to be impacted.

– Any overdrafts associated with your current account(s). Not only will the company doing the search be able to see whether you are in your overdraft, but they will also be able to ascertain how deep into the overdraft(s) you are.

– Any direct financial ties with other individuals, such as partners, previous partners or flatmates.

– Whether you have been convicted of fraud at any time. It also has the capacity to show companies whether you have personally been a victim of fraud.

– Whether you have been declared bankrupt. In some instances, this will stay on your credit score account eternally, but it is far more likely that such information will remain for around five or six years.

When Is a Credit Check Likely to Happen?

A credit check is most likely to happen when you are applying for a loan or a credit card, when you are looking to buy or rent a property, gain insurance, or when you want to take out a mobile phone contract. An employer may also commit to a credit search if you are applying for a job, though this will not always happen, and is usually only done if the individual in question is applying for a position in the financial sector.

What Is a Soft Credit Check?

A soft credit check is, in essence, when a company gleans an overview of your financial status. They will look at certain aspects of your credit score, and if they see that nothing is amiss, will likely conclude than a thorough and more comprehensive search is likely to be unnecessary. Not every company will do a soft search – although they are far more common than hard searches – and tend to be used so as to confirm an individual’s identity.

It is important to note that a soft search will never be visible to any other organisations or businesses

It is important to note that a soft search will never be visible to any other organisations or businesses, and they will subsequently never impact whether or not you are able to take out a line of credit, get a mortgage or secure a loan of any kind. The individual in question, however, will be able to see a record of the soft searches carried out on their credit.

What Is a Hard Credit Check?

Given the summary of what a soft credit check is, it should not be a surprise that a hard credit check occurs when an organisation decides to commit to an all-inclusive search of your credit history. These checks will always be noted down on your credit report, meaning that should another company decide to complete a hard check at some point in the future, they will be able to note other instances when such a search has been carried out.

It is worth pointing out that if there are too many hard searches against your name over a short period of time – six months to a year – then you may struggle to get approved by any companies.

Quite simply, if you make numerous credit applications, you will accrue an array of hard checks. This will very likely hamper your ability to build a strong credit score, and it can be very difficult to remedy the situation. And, while most hard checks will only be visible on your account for around a year, some of them can stay on it for much longer.

What Are the Main Differences Between the Two?

The key differences are quite simple, but they are worth reiterating. Soft checks will not be visible to anyone on your credit account, meaning that you can make as many as you like without there being any negative consequences, while a hard check could impact any applications you make for things such as a credit card or mortgage in the future because they are visible to all relevant companies.

How Can I Minimise the Number of Hard Searches Related to Me?

There is a very quick answer to this question – don’t make a lot of applications for credit! You can massively reduce the number of times a hard search will impact your account by doing soft searches on yourself to check whether you are likely to be eligible for certain deals, mortgages or loans.

The Benefits of Doing Soft Credit Checks on Yourself

The fact that soft credit checks will never show up on your ‘permanent’ credit record means you can use them as often as you like to see how likely it is you will be accepted for credit. This can be very beneficial if you want to check whether or not you can be expected to be accepted for a loan, credit card or some form of insurance, but without having to actually apply. This way, you can make sure you only submit applications for credit that you expect to get, which could massively reduce the number of hard checks that will be placed against your account.

You can massively reduce the number of times a hard search will impact your account by doing soft searches on yourself to check whether you are likely to be eligible for certain deals, mortgages or loans

Easy Ways to Improve Your Credit Score

There are a number of ways to improve your credit score. Some of these will help almost immediately, while others may take some time to make an impact, but they are all absolutely worth considering if you want to improve your chances of being accepted for a loan or being given credit of any kind.

1. Register to vote. If companies aren’t able to accurately pin you down to a specific location, they will be far less likely to accept you for any application. Registering to vote takes around 10 minutes, can be done online, and will massively enhance your credit score.

2. Don’t create joint accounts with an individual who has a poor credit score. If your partner or fellow tenant has a poor credit history, make sure that your bank accounts are not entwined in any way. Also, on a similar note, if you have broken up with someone that you previously had financial ties with, make sure you are no longer linked.

3. Make sure that all of your accounts are attached to the same address. If you have an old account that you don’t use, but is still open, then there is every chance it could be aligned with an old address. If this is the case, and it ends up giving the loan company any degree of doubt, any application could be rejected.

4. Use a credit card if you are able to pay off the spent amount each month. If you can take out a credit card and spend a little bit on it each month that you then subsequently pay off, you will be able to prove to any company checking your credit score that you are not only capable of paying off debt, but that you actively do it. Another credit card tip worth noting down is that you should never take cash out of an ATM with your credit card as you are very likely to end up being charged.

5. If you have credit cards that you don’t use, cancel them immediately. If you have any credit cards that are unused, but are still attached to your name, they could be doing you the world of harm. This is due to the fact that they can potentially reduce the amount of credit that you are able to get access to.

6. If possible, get rid of debt by using your savings. This is, of course, not a viable option for everyone, but if you can wipe out some of your debts using money that you already have, you could enhance your credit score very quickly. If you are looking to get a mortgage, this is probably a good tactic to consider.

Is the managing director of Cobra Payday Loans and Ready Money Capital Limited. He is responsible for all the day to day functions and performance of both companies and regularly contributes information on the short term finance sector. Stuart is an approved person with the Financial Conduct Authority, holding SMF3 (Executive Director) status.