Written by Christy Rodriguez
If you've applied for any type of credit card, mortgage, or personal loan, you'll know it's not as easy as it sounds. The US Federal Reserve reports that only around 30% of credit-related requests are approved every year. This is why it's important to understand how and why companies score individuals through means such as hard and soft credit checks.
In this article, we're diving into how hard credit checks can impact your score – and ultimately, your chances of getting financial requests approved.
What Are Hard Checks?
Also known as "hard pulls" and "hard inquiries," Upgraded Points explains that hard checks are essentially performed to determine whether or not you fit an institution's standards to be given a loan or credit. They want to know if you are able to manage your debts wisely, pay dues on time, and apply for credit moderately. They will also want to know how much credit you've already incurred. Both soft and hard credit checks are done with those same goals in mind, but hard checks work a bit differently and will have a significant effect.
The Impact of Hard Checks
One major consequence of getting a hard check is that it drops around five points from your overall credit score for about six months. Hard checks will also be recorded on your report for up to two years, mainly so that other financial institutions will be able to see where else and when you've applied for credit in the past. This helps them determine whether you're a high-risk customer or a credible one. But don't worry, because lenders, credit card companies, landlords, or any institutions will have to receive your authorization to perform a hard check.
What Are the Effects of a Bad Credit Score?
Having a bad credit score might affect you more negatively than you think. Market Watch attributes a score of 300-579 as a poor credit score – you might still be able to get loans, but those with credit in this range will often receive higher interest rates, or struggle to find lenders that are willing to work with them. Furthermore, it can make it harder for you to acquire certain services, hunt for a job successfully, and even find housing. Surveys also show that homebuyers with lower credit can pay up to $104,000 in extra mortgage costs.
Preparing for a Hard Credit Check
There are multiple ways to raise your chances of passing a credit check. Forbes Advisor suggests keeping your credit utilization ratio below 30% by setting up an automatic balance alert to ensure you pay your bills in advance. It's also important to ask for a higher credit limit if you're always getting close to 30%. If you have the means to, try going for a 10% utilization ratio, especially if you're anticipating a hard credit check in the coming months. It's also helpful to check your score using the yearly free credit report from Experian, Equifax, or TransUnion.
Rate Shopping for Credit Deals
One way to get around having too many hard credit checks on your account is rate shopping. This refers to the practice of seeking out several lenders to help you pick out which lender can best provide for your needs. Your rate shopping window typically ranges from 14 to 45 days, depending on the scoring formula used. These formulas group similar credit inquiries together and count them as a single check because they understand that you're not necessarily shopping around for several houses, car loans, or student loans.
Handling Finances Responsibly
As discussed in our article on 'How to Eliminate Financial Self Doubt', it mainly comes from wanting to 'plan out' the future and determine every single risk in advance. But this can be reduced by coupling faith with responsible financial planning – this of course, includes learning about practical topics like hard checks and credit scores. We hope that this article has been helpful to your desire to build a strong credit profile that can serve as a tool that can help you achieve your aspirations.
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