What is a Hard Inquiry?

Whenever you apply for a loan (any type of loan), lenders often want to gauge your suitability before making a decision. To do this, they request your file from a credit reporting agency, a process that’s known as a hard inquiry or hard credit check.

However, there are other non-credit-related situations that may trigger this type of inquiry. Examples include setting up utility accounts, applying for a cell phone contract, renting an apartment, or even applying for insurance.

Hard inquiries are different from other credit checks because they require your permission. When you sign a credit card application, for example, you're giving the lender's consent to access your credit report.

In Canada, hard inquiries fall under the “negative information” category, which means they can affect your credit score. So, understanding how these inquiries work is essential for maintaining a good score.

Key Takeaways

• A hard inquiry occurs when a lender requests your credit report after you apply for a loan. This action requires your permission and can temporarily lower your credit score.
• In Canada, hard inquiries remain on your credit report for three years with Equifax and six years with TransUnion but only affect your credit score for about 12 months.
• Soft credit inquiries (like checking your own credit report or background checks by potential employers) don't impact your score and are only visible to you on your report.
• Multiple hard inquiries for the same type of loan within a short time frame are typically counted as a single inquiry in scoring models, allowing you to shop for the best loan rates.
• The impact of hard inquiries varies based on your credit history.
• Regularly monitor your credit report for unauthorized inquiries and take immediate action if you spot any suspicious activity. To remove the record, contact the company responsible and file a dispute with the bureau.

How a Hard Inquiry Works

The hard credit check process begins when a potential lender receives your signed credit application. Your signature on that application is sufficient permission for the lender to pull your credit file. The lender contacts either TransUnion or Equifax to formalize the request.

After verifying the lender's identity, the bureau sends your complete report for analysis. Financial institutions evaluate specific aspects, such as your current debt levels and existing financial accounts, before they make a final decision.

Credit reporting agencies must record any activity related to your file, including such checks. They also document which organization requested your information and when.

Hard vs. Soft Inquiry

Not all requests for your credit report are hard pulls. Sometimes, you just want to check your own credit report for personal interest. The bureau will treat these as soft inquiries, or what is formally known as soft credit inquiries or soft credit checks. Unlike hard inquiries, soft inquiries won’t hurt your credit score and you can leverage them to get a free copy of your report regularly. The table below compares the two types of inquiries:

The Impact of Hard Inquiries on Your Credit Score

Canada’s credit reporting agencies consider loan applications a material factor in their scoring models. Every new application docks some points from your credit score, although only temporarily.

The impact depends on your overall credit profile. If you have a lengthy credit history with an excellent payment history, one inquiry will barely affect your score. However, if you have a limited history or a lower score, multiple inquiries may cause a more noticeable drop.

Credit scoring models consider the fact that consumers sometimes shop around for the best rates. That's why multiple hard inquiries for the same type of loan within a short period are usually treated as a single inquiry.

This rate-shopping provision allows you to find the best loan terms without repeatedly penalizing your credit score. In a way, knowing the consequences of the checks helps you to appreciate the importance of a credit score when seeking favorable loan terms.

Duration of Hard Inquiries on Your Credit Report

A record of every hard pull is attached to your profile at the end of a check. This record captures key details like the organization that initiated the check and the time.

But this record doesn’t stay in your report forever. In Canada, the duration varies by credit bureau. Equifax, one of the major credit bureaus in Canada, keeps the details for three years. TransUnion, on the other hand, keeps it for six years.

Though these inquiries remain visible for years, their impact on your credit score diminishes significantly after 12 months. This is good news for consumers who are actively working to improve credit score ratings.

Addressing Unauthorized Inquiries on Your Credit Report

If you spot an unfamiliar record pull, take action immediately. All hard inquiries must have your permission. So, unfamiliar activity could indicate something wrong; it could be related to fraud or even identity theft.

The good thing is that you can remove unauthorized inquiries. First, contact the organization that made the inquiry directly to verify if they are responsible. Second, if you believe the record-pull to be fraudulent, file a complaint with the Canadian Anti-Fraud Center.

Lastly, file a dispute with TransUnion or Equifax to remove the unauthorized inquiry. Attach the documentation from the Canadian Anti-Fraud Center to support your case.

The Bottom Line

Hard inquiries are a normal part of the credit approval process. They may chip away at your rating, but this effect diminishes with time. Always monitor your credit file to track record pulls – soft or hard – and identify any unauthorized activity promptly.

Remember that hard inquiries are just one factor among many that impact your credit score. So, focus on your overall financial health and avoid habits that lead to unnecessary loan applications.