Checking your credit score usually doesn’t lower it, but authorizing other people to check it usually does.
There are many misconceptions when people discuss improving their credit scores and damaging them. You may hear one thing and your neighbor may hear another. These accounts can be confusing, and a bit frightening, especially when you’re dealing with something as important as your credit. And one question has become particularly frustrating: Does checking your credit score lower it?
Before we answer that, we must discuss something the finance world refers to as credit “inquiries.” The Consumer Financial Protection Bureau (CFPB) defines inquiries as: “An inquiry refers to a request to look at your credit file, and it generally falls into one of two types.” The two types are hard credit inquiries and soft credit inquiries. Checking your credit score falls into the soft inquiry category.
These inquiries or “checks” impact your credit score in different ways. But you can control how much they effect it by doing a few basic things.
How Do Hard and Soft Checks Fit into the Calculation?
First off, you need to understand how the top three agencies, Equifax, Experian and TransUnion calculate your credit score. Each agency has a similar scoring model that they use to calculate credit scores. They also created VantageScore 3.0 together to compete against FICO credit scores, which are used in 90% of financing decisions.
Both VantageScore 3.0 and FICO scores range from 300-850. Scores are calculated based on five factors, which carry a certain “weight” in your final score. They include:
- Payment history: 35%
- Outstanding debts: 30%
- Length of your credit history: 15%
- Types of credit you’ve used: 10%
- Amount of new credit: 10%
The last category, “new credit” is where credit inquiries or checks fit, albeit, mostly the hard checks. This factor essentially looks at how many credit checks you’ve authorized recently. It impacts your credit score because a high number of checks means that you’ve applied for several new credit lines recently. That makes you more a of credit risk, because it means you potentially have a lot of new debt to manage. Hence, your credit score is lower because you represent a higher risk of default.
Although new credit applications may not carry as much weight as your “payment history” or “outstanding debts”, they still figure into the calculation. It’s important to know when they affect your score and for how long, so you can space out applications accordingly.
How much does a hard credit check lower your score?
First off, lets investigate the different hard credit checks that occur. They include:
- Applying for a mortgage
- Auto loan applications
- Applying for credit cards
- Student loan applications
- Applying for personal loans
- Apartment rental applications
If a lender checks your credit with your permission, chances are it will be reported as a hard credit check. This could lower your credit score slightly, usually by only a few points. FICO says individual inquiries affect your score within five points or less. This shouldn’t hurt you even if you’re looking for loans or credit cards with low rates. But if you apply for a few different credit card offers all at once, or even within a few months, and authorize the lenders to check your credit score, trouble could ensue.
The reason is simple – lenders might think that you don’t have much cash available and are desperate for credit. They may also think you’re preparing for a spending spree, perhaps an expensive vacation or other large ticket item. It could be one last spending hurrah before you declare bankruptcy. So, don’t get hasty. Spread out your hard credit checks over time.
Do soft credit checks lower your score?
Soft credit checks or inquiries are basically harmless. There are times when they won’t even show up on your credit reports. They usually occur when lenders or creditors, who aren’t authorized by you, check your score. Soft credit checks include:
- Checking your own credit scores
- Credit card offers that are “pre-qualified” or “pre-approved”
- Insurance quotes that are “pre-qualified” or “pre-approved”
- Employment background checks
If you don’t know how a credit check will be reported, ask the lender or credit card company you’re dealing with and they will have the answer. If a soft credit check is recorded as a hard check, you can dispute the error with the credit bureau or contact the CFPB for help.
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How long do credit inquiries affect your score?
All credit inquiries can appear on your credit report for up to two years. If it’s a hard inquiry, then that clock starts from the date you authorized the credit check. Soft inquiries also stay for two years from the date the check was performed.
However, the credit score impact of hard inquiries only lasts for six to twelve months. Any score decrease will only apply up to the first year after you authorized the check. The inquiry still appears on your credit report for another 12-18 months, but after 6-12 months the impact on your credit score is “neutral.” That means it has no effect on your score.
This means that you should try to space out credit applications by at least six months. Ideally, you should only apply for new credit about once per year.
Will Checking My Credit Report Lower My Score?
Every person gets one free credit report per year. Some people prefer checking their credit report more often; that’s your decision. When you check your credit report it will be recorded as a “soft check.” As stated above, soft inquiries or checks won’t lower your credit score.
When you receive your report, you should thoroughly examine it for mistakes or negative items. These items could lower your score. You should review the following:
- Your correct name
- Social Security number
- Current and previous addresses
- Debts and other transactions
- Public records
- Your list of employers
Maintaining a healthy credit report by paying your bills on time and eliminating any errors, among other things, will positively impact your credit score. You get your free credit report from the top three credit bureaus. Remember, get one credit report from each bureau because they may vary.
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Don’t let misconceptions confuse you!
Educating yourself on financial matters will make you a better money manager. And by looking to experts like Debt.com, you can eliminate the white noise that only confuses people about credit scores and what affects them. So, keep learning and use the many tools available that provide pertinent information on how credit scores work, and how you can improve them in a quick and efficient manner.
Credit applications vs quotes – know what you’re requesting!
One key distinction that you need to understand is the difference between a formal credit application and just getting a quote. If you request a quote from a lender or creditor, this does not create an inquiry. This type of request also happens if you request quotes through a loan or credit card comparison tool online. In all cases, you don’t create inquiries when you’re just shopping around.
When you request quotes, lenders will usually give you a general idea of what the loan or credit card will be. A quote will generally show you:
- A range of interest rates that you may pay, based on your credit score
- The maximum term of the loan
- The maximum amount you can finance with the loan
- An estimate or range on the credit limit for the credit card
- Options that can reduce APR, such as signing up for autopay
Unfortunately, unless you go through the loan or credit application process, you won’t know your exact APR or monthly payment. However, when you go through a full online for a specific lender, you usually must check a box to authorize a credit check. This is what creates the hard inquiry. If you apply for multiple loans or cards at once, even if you only end up taking one, it can still damage your credit score.
The exceptions for grouping loan applications in a single inquiry
There are three types of loans which the credit bureaus have an exception for when it comes to inquiries – mortgages, auto loans and student loans. For these types of applications, the credit bureaus make an exception so you can shop for the best rates and payments for your needs. All credit inquiries made within a 30-day period related to a single type of loan are grouped together. Multiple inquiries are effectively treated as a single inquiry.
This means if you’re shopping for a home, you can apply for several mortgages for several different lenders in a single month. As long as all applications happen within a 30-day period, they will all be grouped together as a single inquiry. The same is true for private student loan applications and auto loan applications. It’s important to note that this does not apply to personal loan applications. Personal loan applications, like credit card applications, each count as a single inquiry.
More Credit Check Questions
Q: Why does your credit score go down for a hard inquiry?
A: Credit scores usually only go down by a few points with a hard inquiry, but these inquiries make creditors and lending institutions nervous. That’s because applying for numerous cards at once or within a couple month period makes you appear like you’re desperate for credit – and thus a high risk. If you reduce the amount of hard inquiries, or spread them out over time, you will better maintain your credit score.
Q: How many times a year can you check your credit score for free?
A: You can check your credit score for free as many times as you like, but it’s not necessary. Then again, you certainly shouldn’t ignore it. You should also check your credit report. You can get a free report once a year with the three major credit reporting agencies, Equifax, Experian and TransUnion.
Q: How many points does a hard inquiry affect your credit score compared to a soft inquiry?
A: In general, hard credit inquiries only impact your credit scores by a few points. For the majority of people, additional credit inquiries will take less than five points off their credit scores. Soft inquires, like checking your credit score or a background check by an employee many not even show up on your credit report, so they don’t damage your score at all.
Article last modified on May 30, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Does checking your credit score lower it? - AMP.