It’s no question that as adults we are responsible for managing our finances wisely. Unfortunately, not everyone stands on equal ground when it comes to possessing the relevant knowledge and skills.
Global data shows that only 30% of men are financially literate, according to statistics from Standard & Poor’s Global Financial Literacy Survey. And the number for women is slightly better, sitting at 35%.
If you happen to be outside of that bracket, then concepts such as credit scores and credit checks might be unfamiliar to you. However, these are important topics that will eventually affect your financial freedom and your future, especially when it comes to your retirement plans.
If you’re looking for a good place to start learning, we’re going to discuss all you need to know about hard and soft credit checks in this article, so keep on reading.
Basics: What is a Credit Check?
To answer this, we first need to define credit scores because credit checks and credit scores go hand in hand. Your credit score is essentially a number that reflects your creditworthiness, meaning how likely you are to get loans or credit approved.CNBC describes a good credit score to be over 670, very good to be over 740, and anything over 800 is excellent. Thus, credit checks are performed to determine these numbers.
Who Are the People Involved with Credit Checks?
Credit scores are assessed using scoring models developed by FICO and VantageScore. Credit checks, also known as credit searches and credit pulls, are mostly performed by financial institutions such as banks, building societies, credit providers, and loan providers. They can also be run by utility suppliers, landlords, mobile phone companies, and even employers. The main difference lies in the type of credit check they pull.
What Are Hard Credit Checks?
The type you need to be most wary of is a hard credit check. According to a guide to hard vs soft credit checks by Upgraded Points, these are typically associated with car loans, mortgages, student loans, or credit cards. A hard check can lower your score by up to five points, and this effect can last up to two years. But don’t worry too much, because your consent will always be required before a company runs a hard check on your account.
What Are Soft Credit Checks?
Soft credit checks on the other hand do not require your permission, as these types of checks will not really affect your score negatively. Soft checks are usually performed by card companies who want to check your eligibility for points or rewards. These are also performed by employers who want to use soft checks as a way to run a background check on you. Of course, you can also run a soft inquiry on yourself to monitor your own report.
Can I Fail a Hard Credit Check?
Financial institutions can fail you if they deem you a financially unstable individual – either due to a low credit score, or existing debt, which is actually quite common. In the US alone, Experian reported the average total debt owned by an individual is around $92,727. Most companies will let clients know beforehand their minimum credit score, so it’s useful to keep that in mind to avoid such situations. Preparation will also be your key to success.
Final Words: How Do I Prepare for a Credit Check?
Our best tip is to go ‘rate shopping’, which involves seeking out several lenders before deciding on the best deal to go with. When looking for a loan, there is typically a rate shopping window that ranges from 14 to 45 days, and inquiries made during this time will be lumped into a single credit check. Additionally, Business Insider suggests tracking your credit utilization ratio, which is the second most important factor for credit scores.
Of course, a surefire way to improve your chances of getting credit approved is to settle debts, limit your credit spending, and pay your bills regularly. Improving your financial situation will definitely take some time and effort on your part, and results won’t always be instantly visible. But with consistent work, improving your score and mastering credit check processes is definitely possible.