Find out how credit scores are calculated and how creditors might use them to make certain lending decisions about you.
What is the difference among the two nationwide credit reporting agencies’ credit scores?
A credit score is a three-digit number, ranging between 300 and 900, which is designed to represent your credit risk, or the likelihood you will pay your bills on time. A credit score is calculated based on the information in your credit report.
The way your credit score is calculated and the contents of your consumer file may vary between the two nationwide credit reporting agencies (Equifax® and Trans Union of Canada, Inc.). This is because not all creditors report to both agencies and there are different credit scoring models. While most creditors do report to both, you may hold an account with a creditor that only reports to one, or a creditor that doesn’t report to any. There are many different credit scores used by lenders, including credit scores provided by the two credit reporting agencies, and credit scores that are custom built and used by a specific lender.
Understanding Hard Inquiries on Your Credit Report
Some consumers are reluctant to check their credit report because they are concerned that doing so may impact their credit score. While pulling your own credit report does result in an inquiry on your credit report, it will not affect your credit score. In fact, knowing what information is in your credit report and checking your credit may help you get in the habit of monitoring your financial accounts.
One of the ways of establishing smart credit behaviour is to understand how inquiries work and what counts as a “hard” inquiry on your credit report.
“If you’re shopping for a new auto or mortgage loan, the multiple inquiries are generally counted as one inquiry”
- Equifax Canada
What is hard inquiry?
When a lender or company makes a request to review your credit report as part of the loan application process, that request is recorded on your credit report as a hard inquiry, and it usually will impact your credit score. This is different from a “soft” inquiry, which can result when you check your own credit or when a promotional credit card offer is generated. Soft inquiries typically do not impact your credit score.
Hard inquiries serve as a timeline of when you have applied for new credit and may stay on your credit report for up to 36 months. Depending on your unique credit history, they could indicate different things to different lenders.
Recent hard inquiries on your credit report tell a lender that you are currently shopping for new credit. This may be meaningful to a potential lender when assessing your creditworthiness.
Exceptions to the impact on your credit score
If you’re shopping for a new auto or mortgage loan, the multiple inquiries are generally counted as one inquiry.
The time frames vary for these exceptions. All new auto or mortgage loan inquiries will show on the credit file; however, only one of the inquiries within a specified window of time will impact your credit score. Depending on the credit scoring model being used, the window of time varies from 14 days up to 45 days.
This exception does not apply to credit cards or when you apply for several credit cards at once.
Plan before shopping for a loan
Before shopping for a loan, it’s always smart to proactively plan your finances.
First, learn whether the type of credit you’re applying for can have its hard inquiries treated as a single inquiry. If so, determine the applicable time frame. Then you can plan your shopping period, accordingly.
Second, you may also want to check your credit before getting quotes to understand what information is reported in your credit file. You can request a free credit report from each of the two nationwide credit reporting agencies by visiting their websites.
If you’re worried about the effect that multiple hard inquiries may have on your credit file, it may be tempting to accept an offer early rather than allow multiple hard inquiries on your credit. However, consider your individual situation carefully before cutting your shopping period short. In many cases, the impact hard inquiries have on your credit score from shopping around will likely be minimal compared to the long-term benefits of finding a loan with a low interest rate.
The more informed you are about what happens when you apply for a loan, the better you can prepare for the process. Making a plan for how you will manage hard inquiries now, before you start shopping, may help you prepare for any impact they might have on your credit score.