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Posted on: 16 Aug 2024
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Your credit score is a crucial part of your financial life. It influences your ability to get approved for loans, credit cards, mortgages, and even rental agreements. It's natural to want to keep tabs on your credit score, but many people worry that checking their score too often might actually hurt it. This article clarifies the difference between different types of credit inquiries and explains how they affect your credit score.
Understanding Credit Inquiries: Hard vs. Soft
Not all credit checks are created equal. There are two main types of credit inquiries: hard inquiries and soft inquiries. Understanding the difference between them is key to understanding how checking your credit score impacts it.
Hard Inquiries
A hard inquiry, also known as a hard pull, occurs when a lender checks your credit report to make a lending decision. This usually happens when you apply for a new loan, credit card, or mortgage. Hard inquiries are recorded on your credit report and can potentially lower your credit score, although the impact is typically small.
Examples of Hard Inquiries:
- Applying for a credit card
- Applying for a mortgage
- Applying for a personal loan
- Applying for an auto loan
The reason hard inquiries can affect your credit score is that they indicate you are seeking new credit. Too many hard inquiries in a short period can signal to lenders that you may be a higher-risk borrower. However, the impact of a single hard inquiry is usually minimal, and the effect decreases over time.
Soft Inquiries
A soft inquiry, also known as a soft pull, occurs when you check your own credit report, or when a company checks your credit report for promotional purposes. Soft inquiries are not recorded on your credit report in a way that affects your credit score. They are essentially "invisible" to lenders when they assess your creditworthiness.
Examples of Soft Inquiries:
- Checking your own credit score through a credit monitoring service or credit bureau
- Credit card companies pre-approving you for a credit card
- Employers checking your credit report as part of a background check (with your permission)
Because soft inquiries don't affect your credit score, you can check your credit report as often as you like without worrying about lowering your score.
The Impact of Hard Inquiries on Your Credit Score
As mentioned earlier, hard inquiries can have a small impact on your credit score. Here's a more detailed look at how they work:
How Many Points Does a Hard Inquiry Lower Your Score?
The exact number of points a hard inquiry lowers your score varies depending on several factors, including:
- The overall strength of your credit profile
- Your credit history
- The scoring model used (FICO or VantageScore)
Generally, a single hard inquiry might lower your score by 5 points or less. For someone with an excellent credit score, the impact might be even smaller. For someone with a fair or poor credit score, the impact might be slightly more noticeable.
How Long Do Hard Inquiries Stay on Your Credit Report?
Hard inquiries typically remain on your credit report for two years. However, their impact on your credit score decreases over time. After a year, they generally have very little effect.
Multiple Hard Inquiries and Rate Shopping
If you're shopping around for the best interest rate on a loan (such as a mortgage or auto loan), multiple hard inquiries within a short period might be treated as a single inquiry. This is known as "rate shopping" and it allows you to compare rates from different lenders without being penalized for having multiple inquiries. Credit scoring models recognize that you're seeking the best deal and not necessarily taking on excessive debt. The specific timeframe for rate shopping varies, but it's typically between 14 and 45 days. Make sure to do all your rate shopping within this window.
The Importance of Monitoring Your Credit Score and Report
Regularly monitoring your credit score and report is essential for several reasons:
Detecting Errors and Fraud
Your credit report may contain errors that can negatively impact your credit score. Monitoring your credit report allows you to identify and correct these errors promptly. It also helps you detect any fraudulent activity, such as unauthorized accounts or charges.
Tracking Your Credit Health
Monitoring your credit score allows you to track your progress in improving your credit health. You can see how your payment history, credit utilization, and other factors are affecting your score.
Preparing for Future Credit Applications
By monitoring your credit score, you can identify any potential issues before applying for a loan or credit card. This allows you to take steps to improve your credit score and increase your chances of approval.
How to Check Your Credit Score Without Hurting It
Fortunately, there are several ways to check your credit score without negatively impacting it:
Free Credit Monitoring Services
Many credit monitoring services offer free credit scores and reports. These services typically use soft inquiries, so checking your score through them won't hurt your credit. Examples include Credit Karma, Credit Sesame, and Experian CreditWorks.
AnnualCreditReport.com
Under federal law, you are entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once every 12 months. You can obtain these reports through AnnualCreditReport.com. Checking your report through this website uses a soft inquiry and won't affect your score. While this site provides your *report*, it doesn't automatically give you a credit *score*. You can usually pay a small fee to obtain your score at the same time.
Credit Card Statements
Some credit card companies provide free credit scores to their cardholders as a perk. Check your credit card statements or online account to see if this is an option.
Your Bank or Credit Union
Many banks and credit unions also offer free credit scores to their customers. Check with your financial institution to see if they provide this service.
Tips for Maintaining a Healthy Credit Score
Here are some tips for maintaining a healthy credit score:
- Pay your bills on time: Payment history is the most important factor in your credit score.
- Keep your credit utilization low: Aim to use less than 30% of your available credit.
- Don't open too many new credit accounts at once: This can lower your average account age and signal to lenders that you may be a higher-risk borrower.
- Monitor your credit report regularly: Check for errors and fraudulent activity.
- Avoid maxing out your credit cards: This can negatively impact your credit utilization ratio.
- Be mindful of co-signing loans: If the borrower defaults, you're responsible for the debt.
Conclusion: Check Your Credit Score Confidently
Checking your credit score is a smart financial move. Just remember that *you* checking your score is almost always a soft inquiry and doesn't hurt your credit. Be aware of hard inquiries when applying for new credit, and space out applications to minimize their impact. By understanding the difference between hard and soft inquiries, you can monitor your credit health confidently and take steps to improve your score.
