Do you know what a hard credit check is? Chances are, if you’ve ever applied for a loan or credit card, you’ve experienced one. But what exactly is this type of check, and why do creditors use them? 

It’s important not to confuse hard checks with soft credit checks, with each having a different impact on your finances. Having a better understanding of when these inquiries typically occur will allow you to take greater control over financial decisions. 

Here’s three things you need to know.

What is a hard credit check?

A hard credit check is when a lender asks for a copy of your credit report. They do this to evaluate your creditworthiness – that is, how likely you are to repay a loan.

During a hard credit check, the lender will look at your credit history and financial situation. The process is similar to what happens when you apply for a mortgage or car loan. The lender will consider factors like your employment history, income, and debts. They’ll also look at your credit score and credit history to get an idea of your borrowing habits.

If you have a high risk of defaulting on a loan, the lender may charge you a higher interest rate or deny your application altogether. That’s why it’s important to carefully consider any offers that require a hard credit check. You don’t want to damage your chances of getting approved for a loan by applying for too many lines of credit at once.

How will a hard credit check affect my credit score?

Hard inquiries can negatively impact your credit score, but the effects are usually temporary. They can stay on your credit report for up to two years, but their impact on your score diminishes over time. If you’re concerned about the impact of hard inquiries on your credit score, you can take steps to mitigate the damage. For example, you can avoid applying for new credit accounts too frequently. 

Keeping your overall credit usage low and making sure to always pay your bills on time can help offset the negative impact of hard inquiries and keep your credit score healthy.

Why might you need a hard credit check?

A creditor may do a hard credit check on you for a number of reasons. Perhaps you’ve applied for a loan or credit card, or you’re being considered for a job that requires a high credit score. In any case, a hard credit check is when the creditor requests your credit report from a credit bureau. This information is used to calculate your credit score, which is a number that lenders use to determine your creditworthiness. 

A high credit score means you’re more likely to repay your debts, and you’re likely to get approved for loans and lines of credit. A low credit score, on the other hand, could mean you’re less likely to get approved for loans and lines of credit. So if you’re wondering why a creditor would do a hard credit check on you, it’s probably because they’re trying to gauge your financial responsibility.

This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.