Credit inquiries: Understand how they work in Canada
Credit inquiries are checks performed by financial institutions, companies, or even individuals to assess your ability to meet financial obligations.
These procedures are essential when applying for financial products such as credit cards, loans, or rentals.
Understanding these differences helps you maintain a healthy credit rating and identify any suspicious activity in your credit report.
Would you like to learn more about how credit inquiries work in Canada? Then keep reading!
What is a credit inquiry?
A credit inquiry, also known as a credit check, is a request to access part or all of your credit report information recorded by agencies such as Equifax or TransUnion.
A credit report contains details about your credit history, including payment patterns, outstanding debts, and any delinquent accounts.
Inquiries occur when you apply for a loan, open a line of credit, or even during rental and service application processes.
They help companies decide whether you are a low or high-risk candidate for credit or financial services. In this way, help companies assess your financial responsibility and determine the risk of lending or providing services to you.
In summary, credit inquiries are essential for lenders to evaluate your financial health, helping them make informed decisions on whether to approve credit or loans. Managing these inquiries wisely ensures your credit score stays intact.
Learn about the types of credit inquiries
Now, let’s look at the two types of credit inquiries and how they work in Canada:
Soft inquiry
A soft inquiry is conducted without the intent of approving credit and does not impact your credit rating.
Examples include checking your own credit report or when an institution evaluates your preliminary eligibility for a credit card offer.
Many companies also perform these inquiries as part of background checks, such as for rentals or employment.
Soft inquiries may occur with prior notice, but they only appear on your report for you to see, not for third parties like lenders.
Hard inquiry
On the other hand, a hard inquiry takes place when you formally apply for a financial product, such as a loan or credit card.
These inquiries thoroughly review your history and contribute to your credit rating considerations.
While each hard inquiry has a temporary negative effect, multiple inquiries for the same type of product within a short period (usually 45 days) count as a single inquiry, allowing you to compare rates without hurting your score.
How does a credit inquiry affect my score?
Hard inquiries remain on your report for up to three years and may temporarily lower your score by a few points.
Multiple hard inquiries within a short time may signal elevated risks to new lenders, suggesting that you are facing financial difficulties.
On the other hand, soft inquiries do not affect your score and are useful for monitoring your personal credit.
The key takeaway is to limit hard inquiries by applying for credit strategically. Too many inquiries in a short time can suggest financial instability, making it harder to qualify for favorable loan terms.
What should I do if I don’t recognize a credit inquiry on my report?
If you find an unfamiliar inquiry, act quickly to prevent potential fraud or identity theft issues. First, contact the credit agency (Equifax or TransUnion) and file a dispute.
If the inquiry results from fraud, you can request a correction and consider adding a fraud alert to your profile so that future inquiries are monitored more closely.
Here’s a step-by-step guide on what to do:
- Confirm the Inquiry
Sometimes, inquiries may come from companies you didn’t expect—such as when a lender uses a different name or if a soft inquiry was done for a pre-approved offer.
Contact the company listed to confirm whether the inquiry is legitimate.
- Dispute Errors with the Credit Bureaus
If the inquiry is not valid, file a dispute with the credit bureau that reported it.
You can submit the dispute online or by mail, explaining that the inquiry was unauthorized. The bureau must investigate and respond within 30 days.
- Monitor Your Credit for Fraud
An unknown hard inquiry could be a sign that someone is trying to open accounts in your name.
Check your full credit report for other signs of identity theft, such as unfamiliar accounts or changes to your personal information.
- Place a Fraud Alert or Credit Freeze
If you suspect fraud, contact one of the credit bureaus and request a fraud alert, which makes it harder for scammers to open accounts in your name.
You can also freeze your credit, preventing any new inquiries or accounts without your permission.
- Report Identity Theft
If you confirm that the inquiry is linked to identity theft, file a report with the Federal Trade Commission (FTC) at IdentityTheft.gov and consider contacting local law enforcement.
Tips to limit the impact of inquiries on your credit score
Now you know how credit inquiries can impact your score. But be aware that there are some precautions that can reduce their impact, check them out below:
- Plan your credit applications carefully: Avoid multiple loan or credit card applications within short periods.
- Use the 45-day window for product comparisons: This is particularly useful for mortgages and car financing since multiple inquiries are grouped as one.
- Regularly check your credit report: Reviewing your own report is a soft inquiry and helps monitor errors or fraudulent activities without impacting your score.
- Take advantage of pre-qualification services: Many institutions offer pre-qualification options with soft inquiries to assess your approval chances before submitting an official application.
Understanding the differences between soft and hard inquiries is essential for managing your credit effectively.
By regularly monitoring your report and being strategic with your applications, you can minimize the impact of Credit inquiries on your score and avoid unpleasant surprises.
If you find an unfamiliar inquiry, act immediately to prevent future complications. For more tips on how to maintain a healthy credit score, keep exploring our site and stay informed!
Looking for a good recommendation? Check out our article explaining how credit utilization rates work and how to maintain the ideal ratio for you!