As someone recovering from bankruptcy in Canada, especially in today’s tougher economy, you need to be more vigilant than ever with your credit profiles and credit scores. You may not even be aware when a credit check is being done on you. Besides the obvious, like applying for a car loan or a mortgage, there are times when you might not expect a credit check to be done on you, like when you’re applying for insurance, filling out an apartment rental application or opening a bank account. Unless you’ve read the fine print or asked, you may not even know that there’s a credit check being done on you. Why is this important? Because every credit check done on you shows up on your credit reports. Some will hurt you, by lowering your credit score, and others won’t.
Hard vs Soft Credit Inquiries
There can be a “hard” or a “soft” inquiry made on you. A hard inquiry is one where your full credit profile and score are pulled by the company you are seeking credit from, such as a car loan or a mortgage. A soft inquiry is one where a company just wants to verify some basic information like your name and address, but no credit information. This could be done with your authorization, like to verify your identity when opening a bank account or by a credit card company wanting to send you a pre-qualified (not pre-approved) offer. When you submit that application, it goes through as a hard inquiry. Requesting your own credit reports counts as a soft inquiry.
How Hard Credit Inquiries can Hurt You
It’s the hard inquiries or credit pulls that hurt us the most. Those are the ones that lower our credit scores. It may not be much, for example it might be around 5 points. Due to the confidentiality of the credit scoring models, there is no “guaranteed” point value for each credit inquiry. However, rest assured that each credit inquiry you initiate will lower your FICO credit score. And the more, the worse. Not only will multiple inquiries continue to lower your score, that kind of activity will make you look like a “credit seeker.” Only apply for credit when you are 99% sure that you will be approved.
If you don’t read the fine print, at least look for this
Sometimes when we are in a hurry, we tend to glaze over when someone is telling us the formalities of an application form that we must sign or agree to verbally during a phone conversation. Or maybe you just gloss over the fine print if you have the form in front of you or on your computer screen, assuming that it’s just standard legalese. To be honest, I used to do that, but now, I make it a special effort to look for a clause on credit application forms or I outright ask the person I’m speaking with. Be prepared that many people working in the credit department of companies often are not even aware of the difference between a hard and a soft credit inquiry!
There’s usually some provision that says you agree to allow that company to pull a credit check on you. Look for it. If you don’t see any mention of a credit check, ask about it. If you’re told there will be a credit check, there probably will be one. If you’re told there isn’t, be skeptical. Keep looking for written documentation confirming this, or ask that it be put in writing if you’re at all concerned about another credit check (watch them squirm when you ask for that)! A soft inquiry isn’t so bad, as long as you’re sure it’s a soft inquiry and not a hard inquiry. Potential creditors viewing your credit report won’t see soft inquiries. But they will see the hard inquiries and your credit score will go down by a few points. In time, your FICO credit score will go back up, especially as new, positive changes in your credit report are posted.
How to react to the words “credit check”
Do you break into a sweat every time the word “credit check” is mentioned? I used to. And to be perfectly honest, even today I do, though for different reasons. My FICO credit score is on the rise and is better than it ever was prior to filing for bankruptcy. So I’m not usually so concerned about that aspect, but my bankruptcy still shows up on my Equifax and TransUnion credit reports. In a lot of cases, that’s an automatic disqualification from being approved for things I would have otherwise been approved for.
Let me tell you a quick story about that…
This week, I was logged into my PC Financial account looking over my recent transactions. I’m quite proud of myself for staying on top of everything now. My bills are all paid on time and I even have money in the bank – something I never saw prior to my pre-bankruptcy and poor money management days. Those are times I do not want to see again. So when I saw the link for overdraft protection, I thought “what a good idea!”
Thinking of a contingency plan in case of an unexpected cash shortfall, I decided it would be very reassuring to know that my chequing account could have overdraft protection. That way, in the unlikely event that there wasn’t enough money in my chequing account, my automatic bill payments wouldn’t bounce. Or if I had to write a cheque (which I rarely do now), I’d have the peace of mind knowing that it won’t bounce. The overdraft protection could even serve as an emergency cash source in case I unexpectedly needed some money for a serious circumstance.
Since overdraft protection is a form of credit, I figured a hard credit inquiry would be done. So I phoned to ask, and I was right. The first person I talked to seemed a bit unsure but after asking to speak to a supervisor, it was confirmed. The supervisor, at the PC Financial call centre in New Brunswick, told me that he had recently been discharged from a bankruptcy too. I knew right away that he understood my concerns since he was dealing with many of the same issues as me.
He also told me that due to my bankruptcy, I would not be approved for the overdraft protection, though in the future, it would be easier to obtain a line of credit than overdraft protection. On a whim, I decided to see what the credit qualifications are for approval on a PC Financial MasterCard. He transferred my call. I was greeted by an automated message that listed several requirements. On of them was that applicants have not declared bankruptcy in the last 7 years.
A bit disappointed, I hung up the phone. But at least I had saved myself an unnecessary hard credit inquiry. When you’re recovering from bankruptcy in Canada, you need all the help you can get! Until your bankruptcy disappears from your credit reports, you have one more hurdle to overcome than the rest of our fellow non-bankrupt Canadians do when applying for credit who do. Things are different when you have a bankruptcy appearing on your credit reports.
Keep your credit scores high by avoiding unnecessary inquiries
Even though we may have a higher FICO credit score, a perfect payment history with no late payments and no new negative credit since being discharged, us ex-bankrupt Canadians have fewer options open to us and we have to work harder to prove ourselves. But, that’s the price we pay for being liberated from our past debts. Part of a fresh financial start is educating ourselves on how the credit system works in Canada. You will be more knowledgeable that you were before your bankruptcy, and probably a lot more knowledgeable than the majority of Canadians out there who have good credit!