Does A Credit Check Lower Your Score?

Understanding how your credit score works is crucial for maintaining good financial health. A common concern is whether simply checking your credit report or applying for credit can negatively affect your score. The short answer is: it depends. Let's delve into the nuances of credit inquiries and their impact on your credit score.

What is a Credit Inquiry?

A credit inquiry, also known as a credit check, occurs when someone accesses your credit report. This access can happen for various reasons, such as when you apply for a loan, credit card, mortgage, or even rent an apartment. Not all credit inquiries are created equal; they fall into two main categories: hard inquiries and soft inquiries.

Hard Inquiries: The Ones That Can Affect Your Score

A hard inquiry, also referred to as a "hard pull," happens when a lender checks your credit report to make a lending decision. This typically occurs when you apply for:

• Credit cards
• Loans (auto, personal, student, etc.)
• Mortgages
• Sometimes, apartment rentals (depending on the landlord's policy)

Hard inquiries are recorded on your credit report and can potentially lower your credit score, albeit usually by a small margin. The impact generally diminishes over time, and most hard inquiries cease to affect your score after about a year, disappearing from your credit report after two years.

Why do Hard Inquiries Impact Your Score?

Credit scoring models, like FICO and VantageScore, consider hard inquiries as a potential indication that you are seeking new credit. Applying for multiple credit products within a short period can signal higher risk to lenders, as it might suggest financial distress or a potential for over-extension. Therefore, each hard inquiry can result in a slight dip in your credit score.

How Much Does a Hard Inquiry Lower Your Score?

The precise impact of a hard inquiry on your credit score varies depending on several factors, including:

• Your overall credit history: If you have a long and positive credit history, a single hard inquiry will likely have a minimal impact.
• Your existing credit score: Someone with an excellent credit score (750+) may see a smaller decrease than someone with a fair credit score (620-689).
• The number of recent inquiries: Multiple hard inquiries in a short period will have a more significant impact than a single inquiry.

Generally, a single hard inquiry might lower your score by only a few points (typically 1-5 points). The effect is usually temporary. Most scoring models are designed to recognize that consumers often shop around for the best rates on loans, especially for large purchases like cars or homes. Therefore, multiple inquiries for the same type of loan within a short window (e.g., 14-45 days) are often treated as a single inquiry. This allows consumers to compare offers without fearing a drastic score reduction.

Soft Inquiries: The Ones That Don't Affect Your Score

A soft inquiry, also known as a "soft pull," occurs when you check your own credit report, or when a business checks your credit for pre-approved offers or employment screening. These inquiries are not tied to a specific application for credit. Examples of soft inquiries include:

• Checking your own credit report (through AnnualCreditReport.com or other services).
• Credit card companies sending you pre-approved offers.
• Background checks by employers (with your consent).
• Insurance companies checking your credit for policy quotes.

Soft inquiries are recorded on your credit report, but they are not visible to lenders and do not affect your credit score. They are simply for informational purposes.

Why Don't Soft Inquiries Impact Your Score?

Soft inquiries are not considered when calculating your credit score because they don't indicate that you are actively seeking credit. They are often used for marketing purposes or to provide you with access to your own credit information. Credit scoring models recognize that checking your own credit is a responsible financial behavior and should not be penalized.

How to Minimize the Impact of Hard Inquiries

While you can't entirely avoid hard inquiries when applying for credit, you can take steps to minimize their impact on your credit score:

1. Shop around strategically: When comparing loan or credit card offers, do your research and narrow down your choices to a few lenders. Apply to these lenders within a short window (ideally within 14-45 days) so that scoring models treat multiple inquiries as a single one.
2. Avoid applying for too much credit at once: Applying for multiple credit cards or loans simultaneously can significantly lower your credit score. Be selective and focus on the credit products that you truly need.
3. Maintain a healthy credit profile: A strong credit history with on-time payments, low credit utilization, and a mix of credit accounts will help to cushion the impact of any hard inquiries.
4. Only apply for credit when you need it: Avoid applying for credit cards or loans simply to take advantage of rewards programs or promotional offers if you don't actually need the credit.

The Importance of Checking Your Credit Report Regularly

Even though checking your own credit report through a soft inquiry doesn't hurt your score, it's crucial for several reasons:

• Detect errors and inaccuracies: Your credit report may contain errors, such as incorrect account information, late payments that were reported in error, or even accounts that belong to someone else. Regularly reviewing your credit report allows you to identify and dispute these errors, which can improve your credit score.
• Identify potential fraud: Checking your credit report can help you detect signs of identity theft, such as unauthorized accounts or inquiries.
• Track your credit progress: Monitoring your credit report allows you to see how your credit habits are affecting your score. You can track your progress in paying down debt, improving your credit utilization, and building a positive credit history.

You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year through AnnualCreditReport.com. You can also access your credit report through various credit monitoring services, some of which offer free options.

Factors That Impact Your Credit Score More Than Hard Inquiries

It's important to remember that while hard inquiries can have a slight impact on your credit score, other factors are generally more significant:

• Payment history (35%): Making on-time payments is the most important factor in determining your credit score.
• Amounts owed (30%): Keeping your credit utilization low (the amount of credit you're using compared to your available credit) is crucial.
• Length of credit history (15%): A longer credit history generally leads to a higher credit score.
• Credit mix (10%): Having a mix of different types of credit accounts (e.g., credit cards, installment loans) can positively impact your score.
• New credit (10%): This category includes hard inquiries, but also factors in the age of your newest accounts.

Therefore, focusing on making on-time payments, keeping your credit utilization low, and building a long and positive credit history will have a much greater impact on your credit score than worrying excessively about a few hard inquiries.