You probably know roughly what a credit score is, and that a higher number means good credit and a lower number means bad credit. You probably also know that having a bad credit score can negatively affect your ability to secure a loan.
Many people, however, do not actually know their credit score number. Partly, this is because of a common belief that checking your credit score lowers it. Whether you have good credit and don’t want to tarnish it with a credit check or have bad credit and don’t want it to lower anymore, many people never check their credit score.
But is it true that checking your credit score lowers it? The answer is yes and no. There are various ways to check your credit score, some of which do affect your score and some which do not.
In this article, we’ll delve a bit deeper into credit scores and credit checks to demystify the process.
What Is A Credit Score?
Let’s touch on the basics first. Your credit score is a 3 digit number that lets potential lenders determine the risk of lending money that may not payed back.
Your credit score is created by Canada’s two national credit bureaus, Equifax & TransUnion. They determine your score based on the info they receive from lenders. Without a credit score number, it’s very difficult to secure a loan in Canada.
What Is A Credit Report
The credit report is a more detailed breakdown and review of your financial history compared to the credit score which is just a simple number. Inside the credit report are things such as your contact details, payment history with creditors, a list of any bankruptcies, or other factors that may affect the credit score.
Canadians are entitled to one free credit report per year, which is also called a consumer disclosure. You can request these reports from TransUnion or Equifax online or via mail.
What Influences Your Credit Score?
Many factors go into determining your credit score. Here’s a brief overview of the primary considerations.
- Payment history – 35% – Shows all debts aside from mortgages.
- Credit utilization – 30% – the amount of credit you’ve used vs the amount you have available.
- Length of credit history – 15% – How long you’ve had a credit history and how consistently you’ve used credit.
- Diversity of credit – 10% – how many different types of credit you have. The more the better.
- Credit checks – 10% – how often you check your hard and soft credit scores
Impacts Of Credit Checks On Your Credit Score
Ok, so from the credit influences shown above, credit checks DO play a part in determining your credit score. But, what the heck is hard and soft credit scores? Do they both affect your score? What’s the difference?
Soft Credit Check
A soft credit check occurs when you or anyone looking at lending you money checks your credit history. Contrary to popular belief, this does not affect your credit score.
Some examples of soft credit inquiries include:
- Background check from an employer
- Applying for insurance
- Getting pre-qualified for a credit card
- Checking your credit score online
When you download or receive your annual credit report, this is considered a soft inquiry and does not affect your credit score.
Hard Credit Check
A hard credit check occurs whenever you apply for a new loan or credit card. This type of check, however, can affect your credit score. Lenders like to see how financially responsible you are, and too many of these inquiries in a short amount of time can indicate financial difficulties. That’s why it’s a good idea to apply for credit sparingly and apply with institutions that are likely to approve you.
Some common examples of hard credit inquiries include:
- Credit cards
- Mortgage applications
- Personal loans
- Student loans
- Car loans
One thing to note. Applying for multiple types of certain loans such as car loans, will not affect your score. This is considered “bunching” and multiple applications will only count as one. So go ahead and shop around the best dealership rates without fear.
But, if you check your credit at many different TYPES of places in a short timeframe, this will affect your credit quite a bit.
If you have questions relating to credit scores or need advice on any aspect of your mortgage, contact the experts at Pinsky Mortgages. We’ll help you figure out what lenders are looking for, and give you practical advice on improving your credit scores.
Pinsky Mortgages in Vancouver, BC is a full-service mortgage broker and brokerage, specializing in getting you the best rate and most suitable financing for your needs while making sure you understand the process as well as your actual mortgage.