A credit check is when a company looks at your credit report to get a clear view of your financial standing. Through the credit report, they can determine whether you are responsible with your credit accounts or not.

 

Are credit checks something you should worry about?

The Types of Credit Checks

There are two types of credit checks that you will encounter: a soft credit check and a hard credit check.

Soft Credit Checks

A soft credit check (sometimes called a soft inquiry) is when a company administers a check on your credit report in times when you’re not applying for new credit. The company does not need your permission to do this. It could’ve already happened, and you wouldn’t have any idea.

Hard Credit Checks

A hard credit check (sometimes called a hard inquiry) is when a company administers a check on your credit report when you are applying for new credit. Unlike soft credit checks, companies will need your authorization to go through with this.

 

Another major difference between soft and hard credit checks is the impact on your credit report. A soft check will have no impact. A hard check will be recorded on your credit report and could potentially influence your consumer credit score.

Should You Avoid Credit Checks?

Credit checks are unavoidable when it comes to certain financial decisions, like applying for a loan online. One of the top 4 myths about online loans is that they will instantly result in poor credit because of a credit check — if this were true, no one would apply for personal loans online in the first place.

 

The company may run a hard check, which will be recorded on your credit report. The result could lower your score, but not dramatically so. If you have a good credit score, you won’t find it suddenly at the bottom of the rankings with one hard check.

 

Your credit score is more likely to be impacted by your payment history. So, if you get approved for an online loan, you will want to commit to following the billing cycle carefully and making payments on time. Consistently missing payments will not only extend your billing cycle and increase your total owed, but it could lead to a lower credit score.

The Problem with Avoiding Credit Checks

Sometimes, avoiding a scenario where you’ll need a credit check could result in more financial consequences.

 

For example, you’re considering applying for an online loan to cover an emergency expense because you don’t have enough savings available. Applying for the loan will require a credit check, which could show up on your credit report and temporarily lower your score. But, skipping the loan could have a negative consequence on your score, too.

 

Without the loan, you may not be able to safely cover the expense with the funds in your checking account. If you try, you could put your account into overdraft. If you don’t have overdraft protection, your scheduled payments may not go through. You could spend funds meant for other monthly essentials (like utility bills) and get behind on payments. Those late bill payments can hurt your credit score, and they come with some serious penalties, like late fees, service cut-offs and asset losses.

 

Sometimes, you’ll be in a situation where your credit score will be impacted no matter what step you take. When it comes to a single hard credit check, the drop won’t be dramatic. Dramatic drops in credit scores often happen in severe circumstances, like when debts go to collections or when you file for bankruptcy.

 

Choose the solution that offers the lowest amount of risk to your financial stability. Focus on how you’ll manage your funds first — not the number on your credit report. You can focus on that later.