And “Which do you choose, a hard or soft option?”, the Pet Shop Boys once famously asked. For years, fans and critics have tried to decipher the meaning of that question. Perhaps, we might suggest, they were talking about credit checks.

After all, a lot has been made of the difference between a soft and hard credit check. Whereas most experts will advise you to be extremely careful with hard credit checks, they strongly urge you to regularly perform a soft credit check.

Why is this? What is the problem with a hard credit check? And: What does it all mean for you?

The purpose of credit checks

To most of us, credit checks are a nuisance. Their only purpose, it seems, is to prevent you from getting a credit.

In reality, credit checks fulfil an extremely important purpose in financing a car. They tell the seller that you can be trusted to pay back your loan. So it#s actually the other way around: Without the information contained in a credit report, they might not even be willing to lend to you at all.

Credit checks also prevent you from taking on more debt than you can handle. Sometimes, this may not be what you would like to hear. But it’s usually for the better.

This is not to say that credit checks can’t be an issue. Because they can. But at their most basic level, they are actually quite helpful.

Who actually provides the information?

Credit ratings and credit reports make use of information compiled by so-called credit reference agencies. There are three major agencies in the UK: Experian, TransUnion (formerly CallCredit) and Equifax.

These companies collect information from your financial transactions. For this, they rely on lenders across the country. If you miss a payment on a bank loan, for example, the bank will inform one or all of the credit reference agencies about this. As a result, the missed payment is included in your report. And your rating suffers accordingly.

Beside the big three, there are a few minor credit reference agencies. But they are not very relevant. Most lenders and dealers will simply use one of the big three when taking a decision.

What kind of information is revealed in a credit check?

Let’s imagine you’re applying for a car loan with a bank. To assess the risk, the bank would obviously run a credit check on you. Regardless of whether they’re with Experian, TransUnion or Equifax, this is what they’d see:

• “Your full name and date of birth
• Electoral roll information to confirm your current and previous addresses
• All loans, credit card and mortgage accounts that are open, their start date and loan amounts. All accounts closed in the last six years will be listed.
• Current account overdraft
• Joint accounts with other people e.g spouses
• Any missed repayments and number of times it has happened
• History of debt including bankruptcy and CCJs
• Information on whether your identity has been used for fraud”

Importantly, a credit report also includes previous application searches and footprints. This is why some experts worry about credit checks: The more of them you’re running, the more footprints you’re leaving.

Unless, of course, you’re performing a soft credit check

No one, however, will know when you’re applying for a soft credit check. You can perform one of these checks as often as you like. Some actually recommend you do so regularly to make sure the information is up to date and correct.

A soft credit check will not bring up your full credit report. It merely includes a selection of basic data. Although this information is useful, it won’t tell a prospective lender enough to decide between granting you a loan or not.

So why do soft credit checks exist at all? Their main field of use are so-called pre-checks. At a preliminary stage, you or the lender can run a soft credit check to see if an application has a serious chance of success. If things are already looking bad at this stage, you may want to avoid continuing with a hard credit check.

They won’t show in your report. They won’t leave a footprint. And they won’t affect your chances of getting credit.

Hard credit checks are different

Hard credit checks, however, come with consequences.

A hard credit check occurs when you’re officially applying for a loan. At this stage, the lender will want to see all of the above information to decide whether they want to extend the loan to you or not.

Whenever you, a dealer or a bank apply for one of them, this will leave a mark on your report. This is not an issue if your bid is successful. It need not be a problem either if you’re applying for a loan with two different credit institutions and one of them fails. And it even may remain without repercussions if both fail.

Things will, however, start looking dire as soon as you have too many credit checks showing up on your report within a short period of time.

To many lenders, this is a sign that your credit worthiness is being questioned. This is exactly the reason why many experts are warning against too many hard credit checks.

How long do hard credit searches remain on your file?

For two years. That’s quite a long time, if you’re really worried about this.

That said, other types of entries stay visible for far longer:

• Bankruptcies and court orders against you stay on your report for six years.
• Missed payments remain visible for three years.

The fact that hard credit searches are only on your report for two years already indicates that they’re not quite as important as some make them out to be.

The bigger picture

Before we move on to how to deal with this potential problem, let’s therefore first take a look at the bigger picture.

Yes, hard credit checks on your report can become an issue. On the other hand, you should not make too much of them. And neither will most lenders:

• Very few lenders will reject a loan application solely on the grounds of a few hard credit checks.
• Instead, they will focus on your overall debt, your track record of paying back your loans as well as your credit utilisation ratio.
• Credit reference agencies can yield wildly different credit scores. This is why many lenders have learnt to be cautious about awarding too much importance to them.
• Hard credit checks are a requirement in many cases. Even if you’ve been with a bank all your life, they’ll need to perform a hard credit check every time you apply for credit.

This is not to say that you should treat hard credit checks lightly. What it does mean is that you should not be afraid of them, either.

How to deal with hard credit checks

What you should do is take a sensible approach to hard and soft credit checks. Here are some of the best recommendations:

• Perform soft credit checks from time to time. These provide you with useful information about your credit status. Also, this will allow you to see whether the information on file is accurate and whether someone may be illegally accessing your data.
• Avoid performing too many hard credit checks. When in need of a loan, be selective and focus on a few loans within a short period of time.
  Before applying for a hard credit check, perform a soft one to gauge your chances of success. If they’re slim don’t even apply for the loan.

The good thing is that all credit reference agencies are legally required to allow you to perform a soft credit check at no cost. So make sure to use that to your advantage before going all the way with a hard credit check.