Credit Checks: Soft vs. Hard Checks

Almost every day we have clients ask if we need to do a “hard credit check” to get them pre-approved for a mortgage. The answer is simple, YES. We need to make sure that we fully understand our clients credit profiles, that the credit bureaus have the most up to date information and that the bureaus aren’t reflecting any mistakes. You would be surprised to hear that in about 1 out of 10 files we see a mistake or inaccurate balance on our clients credit reports. We want to know all of this information BEFORE our clients write and offer, this way we can be out in front of the lender getting the bureau updated prior to submitting a mortgage application.

What is a hard credit inquiry?

Hard inquiries, or “hard pulls,” are completed by mortgage broker, financial institutions, utility companies or credit card issuers while checking your credit as part of the application and decision-making process about whether or not to lend you money.

Hard inquiries can lower your credit score if too many inquires are made in a short period of time. The algorithm at the credit agencies is OK with about 2-3 credit pulls per year. They don’t want to see more than this. If you’re shopping for a home, it’s important that you don’t have multiple banks pull your credit. (Note that mortgage brokers pull your credit 1 time only and can send your bureau to an unlimited number of lenders).

Protip: Many clients shopping for a new credit card or a new car make the mistake of letting several people complete hard credit checks! Don’t do it, get all the information you need and then when you’ve decided what car or what card works best for you, have 1 person do a hard credit check.

Some examples of hard checks are:

• Mortgage applications
• Auto loan applications
• Credit card applications
• Student loan applications
• Personal loan applications
• Some apartment rental applications (make sure to ASK the person evaluating your file)

What is a soft credit inquiry?

Soft inquiries, or “soft pulls,” are most likely to be carried out when a person or company investigates your credit as part of a background check. Soft inquiries do not affect your credit score like hard o

Some examples of soft checks are:

• Credit card issuers offering special promotions
• Potential employers
• Checking your OWN credit
• Overall, when you’re thinking about maintaining a great credit score, here is what is key:
• Be intentional about which credit providers you are allowing to do hard hits on your credit report.
• USE AUTOPAY. Silly mistakes like missed cell phone bills have a huge effect on your credit (much worse that an extra hard credit hit each year).
• Try to maintain at least 2 types of credit, with limits of at least $2,000.
• Keep your balances at 50% of the limit if possible. Tip: you’re better off to have 2 credit cards, with limits of $10,000 and balances of $5000 than you are to have 1 credit card with a limit AND balance of $10,000.

If you need help navigating the credit world, connect with your broker, (or us)! we’re happy to help answer your questions.  

Credit inquiries when applying for a mortgage?

When applying for a mortgage, you authorize the financial institutions to make a hard inquiry on your credit.

By allowing multiple institutions to pull your credit, could harm your credit score. If, however, your mortgage broker is having multiple lenders compete for your mortgage business, this will only count as one hard inquiry.

Credit scores start from 300 to 900 points.

Here is a breakdown of the range:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very good
• 800-850: Excellent

To ensure the best offers and rates in Canada, mortgage lenders require a credit score of at least 680 to obtain approval. Checking on your own.

With more substantial credit, your chances of being approved for the financial applications improve, and you will be eligible to obtain the best possible terms and rates.

• Avoid applying for multiple credit cards and car loans
• Pay your bills on time
• Pay your debts in full
• Increase your credit score amount whenever you have a chance
• Avoid spending more than 2/3 of your credit limit

To keep track of your credit scores, check the Credit Karma app, which directly generates credit reports from Equifax and TransUnion.