Credit and finances can be a heavy topic for the average person. The basics of finance are easy enough, but if you delve a little deeper, it is filled with a lot of confusing jargon that might confuse you. This is especially true when it comes to the topic of credit checks, or credit inquiries
You have probably heard some of the myths about how inquiries can harm your credit score. As a result, you may find yourself wondering how inquiries really do impact your credit profile and what kind of checks and inquiries there are.
What is a credit check
A credit inquiry or credit check, is a record on your credit report that shows who accessed your credit information and when they did so. In the case of Malaysia, the CCRIS would be the main organisation handling your credit record. Other approved credit reporters are the Credit Bureau Malaysia Sdn Bhd., CTOS Data Systems Sdn Bhd., and Experian Information Services (Malaysia) Sdn Bhd.
Certain types of credit checks can potentially damage your credit score, though this is not always the case. These credit checks are known as hard inquiries or hard checks.
When lenders check your credit with a hard check, they often make a note of their official review in your credit reports. They use that information to assess how you have handled credit in the past, how often you have paid your debts and bills on time, and whether you have any bad history or blemishes on your credit reports.
They also want to know how much credit you are currently juggling and how long you have been managing your credit. All of these factors help creditors decide whether to extend new credit to you or give you additional credit.
On the other hand, a soft inquiry is a credit check that does not damage your credit score in any way, since you are not applying for new credit. In fact, under circumstances such as a lender checking your credit, perhaps to conduct a background check to pre-approve you for a credit card, the soft check will likely not appear on your credit report at all. Since soft inquiries are not connected to a specific application for new credit, they are only visible to you when you view your credit reports.
Examples of credit checks
The difference between a hard and soft credit check generally boils down to whether you gave the lender permission to check your credit. For the most part, if you gave the lender permission to check your credit reports, then it may be reported as a hard check. If you didn’t provide permission, it should be reported as a soft check.
Here are some examples of when a hard check or a soft check might be placed on your credit reports. Do note that the following is not an exhaustive list, but a general guide as to some examples of a credit check.
|Hard credit check
|Soft credit check
|- Mortgage applications
- Auto loan applications
- Credit card applications
- Student loan applications
- Personal loan applications
- Apartment rental applications
|- Checking your credit score CCRIS (Or other credit reporting agencies)
- “Prequalified” credit card offers
- “Prequalified” insurance quotes
- Employment verification (i.e., background check)
How many checks is too many?
As we have already established, soft credit checks generally do not affect your credit score. Hard credit checks on the other hand, have the potential to affect it severely. So how many is too many? The effect of a hard check on your credit scores ultimately depends on your overall credit health. In general, adding one or two hard inquiries to your credit reports could lower your scores by a few levels, but overall it is unlikely to have a significant impact.
On the other hand, having a lot of hard inquiries within a short period of time will likely have a greater impact on your scores. This is because most credit-scoring models and lenders tend to look at multiple credit applications in a short amount of time as a sign of risk. Though there can be exceptions when you are shopping for specific types of loans, like car loans, student loans or mortgages.
How to reduce the impact of a hard check on your credit
Hard credit checks on their own generally are not enough to significantly reduce your score in a lasting way, unless you have many hard checks on record in a short period of time. This is especially true for those who have a positive credit history. In most cases, hard checks may result in a temporary dip in your credit score which will resolve itself in a few months time.
The most effective way to cushion yourself against hard inquiries is to improve your credit score through other means. To do this, focus your attention on the following areas:
- Always make your payments on time across all your accounts
- Pay down your debt and keep your credit utilisation ratio below 30% as a rule of thumb (The lower the better)
- Pay off any past-due accounts, including collections or charge-offs
- Periodically check your credit report and credit score and pay close attention to the risk factors included with your score
- Apply for credit only when you need it
Hard checks on your credit can be problematic if they hit you at an inappropriate time, it should not cause you too many issues as long as you do not keep getting your credit report checked. Regardless, strengthening your overall credit file is always a good idea to ensure any impact is cushioned. If you are unsure what might be causing your credit score to drop, you can check out this article here.