What is a soft credit check?
2 October 2023
By Joy Pearson
When you're considering financing a car, one of the critical factors that lenders assess is your creditworthiness. This assessment typically involves a credit check, which can fall into two categories: soft credit checks and hard credit checks. While both types of credit checks provide valuable information to lenders, they serve different purposes and have varying impacts on your financial profile. In today's post, we'll delve into what soft credit checks really are, what happens during a soft credit check and how they can affect your car finance application.
A soft credit check, often referred to as a soft inquiry of soft pull, is a process that involves the review of your credit report without causing any impact on your credit score. In essence, it's like taking a peek into your financial history without leaving a trace. These checks can be initiated by various parties, including lenders, creditors, and even yourself through credit monitoring services. They serve informational purposes and typically don't require your explicit permission.
During a soft credit check, the entity performing the checks reviews your credit report. This report provides a snapshot of your credit history, including details about your open and closed credit accounts, payment history, outstanding debts, and any public records such as bankruptcies or tax liens. What makes a soft credit check distinct is that it does not affect your credit score in any way. Whether you initiate it yourself or a lender does as part of a pre-qualification process, your credit score remains unchanged. This is because soft inquiries are not tied to a specific credit application or new credit. Instead, they are a way to access your credit information for various purposes, such as pre-qualification for financial products or conducting background checks that don't involve lending decisions.
Soft credit checks serve as a crucial role in the car finance application process, particularly in the initial stage of pre-qualification. When you express interest in obtaining car finance, many lenders will perform a soft credit check to assess your creditworthiness. This preliminary assessment helps you gain insight into the financing options available to you before you apply. In essence, it's like getting a sneak peak into the world of lending, offering you a clear idea of the terms and rates you might expect based on your credit history and financial profile. This step is immensely valuable as it enables you to compare offers from different lenders, saving you time and reducing the risk associated with multiple hard credit inquiries, which can temporarily impact your credit score.
When you're in the market for a new car, it's common practise to seek out loan offers from various lenders to secure the most favorable deal. However, a potential challenge arises with this approach - each formal loan application typically triggers a hard credit check, also known as a hard inquiry. These hard inquiries can have a temporary adverse effect on your credit score. Some credit checks come to the rescue in this situation. Since they don't leave any mark on your credit score, you can use them for 'rate shopping' without the worry of credit score fluctuations. This means you can actively explore and compare different loan offers without the fear of negatively impacting your creditworthiness. It empowers you to make an informed decision when selecting the most suitable financing option for your new vehicle.
Beyond their role in the application process, soft credit checks offer another valuable function - personal credit monitoring. You can initiate soft credit checks yourself to keep a watchful eye on your credit report. This ongoing monitoring enables you to stay vigilant for any changes or potential issues that might affect your credit standing. By regularly checking your credit with soft inquiries, you can quickly identify and address any discrepancies, errors, or unexpected changes in your report. This proactive approach to personal credit management can help safeguard your financial reputation and ensure your credit remains in good standing.
Understanding the difference between soft and hard credit checks is essential when applying for car finance. Soft credit checks provide valuable insights without affecting your credit score, making them a useful tool for pre-qualification and rate shopping. By being aware of how soft credit checks work, you can make more informed decisions on your car finance journey, ultimately securing the best deal for your new vehicle.