Does Checking Your Credit Score Lower Your Credit?

Maintaining a good credit score is crucial for various aspects of your financial life, from securing loans and mortgages to getting approved for credit cards and even renting an apartment. Naturally, many people are diligent about monitoring their credit score. However, a common concern is whether checking your own credit score can negatively impact it. The short answer is: it depends. This article dives deep into the nuances of credit inquiries, differentiating between "hard" and "soft" inquiries and explaining how each affects your credit score.

Understanding Credit Inquiries: Hard vs. Soft

To understand the impact of checking your credit score, you need to understand the two main types of credit inquiries:

• Hard Inquiries: These occur when a lender or financial institution checks your credit report as part of an application for credit. This typically happens when you apply for a loan, a credit card, or a mortgage.
• Soft Inquiries: These occur when you check your own credit report, or when lenders check your credit for pre-approved offers. They also happen when companies run background checks (with your permission, of course).

Hard Inquiries Explained

Hard inquiries are a record of your applying for credit. Lenders use this information to assess your creditworthiness and the risk associated with lending you money. Too many hard inquiries in a short period can signal to lenders that you are actively seeking credit and may be a higher risk borrower. This is because lenders might interpret this behavior as a sign that you are financially stressed or are accumulating too much debt.

Each hard inquiry can potentially lower your credit score, though the impact is usually minimal, especially if you have a strong credit history. The effect generally diminishes over time and disappears entirely after about two years. Credit scoring models, such as FICO and VantageScore, are designed to account for normal credit-seeking behavior, like shopping around for the best mortgage rates.

Factors Influencing the Impact of Hard Inquiries

Several factors influence how much a hard inquiry impacts your credit score:

• Number of Recent Inquiries: Multiple hard inquiries within a short timeframe are more likely to negatively impact your score than a single inquiry.
• Credit History: A long and positive credit history can help cushion the impact of hard inquiries.
• Type of Credit Sought: Applying for multiple different types of credit (e.g., a credit card, a personal loan, and a car loan) simultaneously may raise more red flags than applying for the same type of credit within a short period, like rate shopping for a mortgage or auto loan.

Soft Inquiries Explained

Soft inquiries, on the other hand, have absolutely no impact on your credit score. They are essentially "invisible" to lenders when they're assessing your creditworthiness. These types of inquiries are for informational purposes and don't indicate that you are actively seeking credit.

Checking your own credit report and score falls under the category of a soft inquiry. This is crucial for understanding your credit health, identifying errors, and monitoring your progress in building or rebuilding your credit. You are encouraged to regularly review your credit report to ensure its accuracy and identify any potential fraudulent activity.

Why Checking Your Own Credit Score is Important

Regularly checking your credit score and report is a responsible financial habit. Here are a few key reasons why:

1. Identify Errors: Mistakes on your credit report are more common than you might think. These errors can negatively impact your credit score, so it's essential to catch and correct them as soon as possible.
2. Detect Fraud: Unauthorized activity on your credit report can be a sign of identity theft. Monitoring your credit report helps you identify and address fraudulent activity promptly.
3. Monitor Progress: Tracking your credit score allows you to see how your financial decisions are impacting your credit health. This can motivate you to make positive changes, such as paying bills on time and reducing your debt.
4. Negotiate Better Rates: A good credit score can help you qualify for better interest rates on loans and credit cards, saving you money in the long run.

How to Check Your Credit Score and Report

There are several ways to check your credit score and report without negatively impacting your credit:

• AnnualCreditReport.com: You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. This is a great way to monitor your credit history and identify any errors.
• Credit Karma and Credit Sesame: These websites provide free credit scores and reports based on VantageScore. While VantageScore is not the same as FICO, it can give you a good indication of your overall credit health.
• Your Credit Card Statement: Many credit card companies now offer free credit score updates as a benefit to their cardholders.
• Your Bank or Financial Institution: Some banks and credit unions also offer free credit score monitoring services to their customers.

Understanding the Different Credit Scoring Models

It's important to note that there are different credit scoring models, such as FICO and VantageScore. Each model uses different algorithms to calculate your credit score, so you may see slightly different scores depending on which model is used. The most widely used model is FICO, which is used by the majority of lenders. VantageScore is another popular model that is used by some lenders and is also available through various free credit monitoring services.

FICO Score Factors

The FICO score considers the following factors:

• Payment History (35%): This is the most important factor. Paying your bills on time is crucial for maintaining a good credit score.
• Amounts Owed (30%): This refers to the amount of debt you owe compared to your available credit. Keeping your credit utilization low (ideally below 30%) is important.
• Length of Credit History (15%): A longer credit history generally results in a higher credit score.
• Credit Mix (10%): Having a mix of different types of credit (e.g., credit cards, loans) can positively impact your score.
• New Credit (10%): Opening multiple new accounts in a short period can negatively impact your score.

VantageScore Factors

VantageScore also considers several factors, although the specific weighting differs slightly from FICO:

• Payment History (Extremely Influential): Similar to FICO, this is the most important factor.
• Age and Type of Credit (Highly Influential): A mix of credit accounts and a long credit history are beneficial.
• Credit Utilization (Highly Influential): The amount of available credit you're using.
• Total Balances/Debt (Moderately Influential): The total amount of debt you owe.
• New Credit (Less Influential): Opening many accounts quickly can be a negative.
• Available Credit (Less Influential): The amount of credit you have available to you.

Tips for Improving Your Credit Score

If you're looking to improve your credit score, here are some actionable tips:

1. Pay Bills On Time: This is the most important thing you can do to improve your credit score. Set up automatic payments or reminders to ensure you never miss a payment.
2. Keep Credit Utilization Low: Aim to keep your credit utilization below 30% on each of your credit cards.
3. Don't Close Old Credit Card Accounts: Closing old accounts can reduce your overall available credit and increase your credit utilization.
4. Dispute Errors on Your Credit Report: If you find any errors on your credit report, dispute them with the credit bureaus.
5. Become an Authorized User: If you have a trusted friend or family member with a credit card in good standing, becoming an authorized user on their account can help boost your credit score.
6. Consider a Secured Credit Card: If you have limited or no credit history, a secured credit card can be a good way to build credit.

Common Misconceptions About Credit Scores

There are many misconceptions about credit scores. Here are a few common myths:

• Myth: Checking your own credit score will lower it. Reality: Checking your own credit score is a soft inquiry and will not impact your credit score.
• Myth: Closing a credit card will improve your credit score. Reality: Closing a credit card can actually lower your credit score by reducing your overall available credit and potentially increasing your credit utilization.
• Myth: Having a high income means you have a good credit score. Reality: Income is not a factor in calculating your credit score. Credit scores are based solely on your credit history.
• Myth: Debt consolidation will hurt your credit score. Reality: While debt consolidation can initially lower your credit score due to the hard inquiry associated with the new loan, it can ultimately improve your credit score by simplifying your debt payments and potentially lowering your interest rate.