When a prospective lender makes a credit enquiry to a credit bureau, there are two different options of data available for them to pull on your credit report; And these may be soft enquiries or hard enquiries.
There are three main credit checking bureaus in Australia: Equifax (formerly known as Veda), Illion (previously called Dun & Bradstreet), and Experian. Whilst both types of credit enquiries require a third party, like yourself or a lender, to view your credit report, only a hard enquiry can negatively impact your credit score.
This blog edition provides some key insights into the differences between the two credit enquiries and other related information that will come in handy for anyone who wants to learn more about personal finance.
Let’s start beginning with the basics.
What is a hard enquiry?
Hard enquiries typically happens when you apply for any lines of credit including a personal loan, credit card, or mortgage, and you generally have to authorise them. These type of enquiries can lower your score by a few points, and it will remain on your credit report for a period of up to 2 years.
However, one must remember that a hard enquiry is not a bad thing and it should also not be looked at from a negative lens. Hard enquiries are part of the normal process done when securing credit. The good thing is your credit health does repair over time and the hard enquiry will usually fall away at this time. Plus, if you practice responsible borrowing and are able to diligently follow through on your repayments, you may be able to gain a higher score.
What is a soft enquiry?
Soft enquiries are more common when a person or a company pulls your credit report as part of a background check. Real-life scenarios such as you are looking to rent a property. Other examples include employer background checks, or even checking your own credit score. Quite different to a hard enquiry, a soft one may occur without your permission. However, it won’t affect your credit score and these may not even show on your score or credit report, depending on the credit bureau.
The table below provides a guide to the variations between a hard vs soft enquiry:
Hard Enquiries | Soft Enquiries |
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It’s always advisable to ask the institution or vendor during any financial process which type of credit enquiry they may perform. Remember that it is your right to know this information. And they are mandated by the law to disclose whether or not it’s a hard or soft enquiry.
Best Practices for Managing Your Credit Profile
Aside from communicating with vendors and financial institutions, there are also other ways to safeguard your credit profile and manage the enquiries being made on your account.
1. Space out credit applications
While having multiple active loans is not something that is really recommended, there may be valid reasons as to why an individual may seek to acquire more than one loan. If you are in this situation, just make sure to try and space out your applications accordingly. This approach may help minimise the impact of hard enquiries on your credit score.
Do you have other options aside from this? Of course. You can always choose to apply from only one financial institution to avoid multiple hard enquiries. If you need a big loan amount, review your credit account beforehand and determine the strong points of your profile. In this way, you will have an idea how you can negotiate with your bank or lender. We have written a helpful guide on mastering the art of negotiation which you can read here.
2. Always review your credit report
If you don’t already know, you can request for your free credit report annually from each of the three main credit bureaus. Although an annual check might be too long, and this might not help you safeguard your account from fraudulent activities. This is where free credit checking tools come in.
There are lots of free credit score tools in Australia you can choose from. And we have actually created a list of the best free credit score apps you can use. Make sure to review each one of these to see which one best suits your needs.
3. Utilise pre-approval and rate shopping processes
Doing this will not decrease your credit score. And you would also have the advantage to choose the best loan option for your need. Just keep in mind that when you shop for loans, specifically for auto loans and mortgages, you need to do so within a short time frame (typically 14-45 days) to ensure that multiple enquiries are treated as a single enquiry for scoring purposes.
4. Protect your personal information
Regularly updating your passwords and being cautious about sharing personal information is your shield against identity theft. Doing so can avoid unauthorised credit enquiries and accounts being opened in your name.
5. Dispute Unauthorised Enquiries
Referencing back to point number 2, this is the main reason why regularly checking on your credit profile is important. You need to act quickly when you see any unauthorised or incorrect enquiries on your credit report.
How can I dispute an authorised enquiry?
Regardless on what credit reporting bureau you saw the unauthorised enquiry from, these are the steps you need to do to report incorrect information on your profile.
Contact the credit reporting agency – Reach out to the credit bureau and provide them with the details and request its removal. You may need to provide identification documents and any evidence that supports your claim.
Contact the creditor – Also get in touch with the creditor who made the unauthorised enquiry. Explain that the enquiry was not authorised by you and know the next steps you need to do to report possible fraudulent activities made in your behalf. You may need to secure a police report as well if you suspect identity theft.
Don’t forget to follow-up – Monitor your credit report to see if the enquiry has been removed. But it may take several weeks for changes to appear. If the enquiry remains on your report after a reasonable period, you may need to provide additional information or escalate your dispute.
Consider additional steps if necessary – If the issue is not resolved, you can also consider filing a complaint with the Australian Financial Complaints Authority (AFCA). AFCA provides consumers with a free and independent service to resolve disputes with financial firms, including issues related to credit enquiries.
Still looking for more information not included here? You can refer to the credit bureaus websites directly. We have provided below quick links on the credit correction portal and related information for all three credit agencies.
Have other burning questions not yet covered by one of our previous articles? You can send us an email at info@friendlyfinance.com.au and we would be more than happy to create a new post on that.
