Understanding how your credit score works is crucial for financial health. One common misconception is that simply checking your credit score will negatively impact it. This article aims to debunk this myth and provide clarity on the different types of credit inquiries and their effect on your credit score.
Understanding Credit Scores: A Foundation
Before we dive into the impact of checking your credit score, let's briefly recap what a credit score is. A credit score is a three-digit number that represents your creditworthiness. Lenders use it to assess the risk of lending you money. Higher scores indicate lower risk, leading to better interest rates and loan terms.
The two most commonly used credit scoring models are:
- FICO Score: Developed by Fair Isaac Corporation, the FICO score is widely used by lenders.
- VantageScore: Created by the three major credit bureaus (Equifax, Experian, and TransUnion), VantageScore is another popular scoring model.
While both models consider similar factors, there might be slight variations in how they weigh each factor, leading to potentially different scores.
The Myth: Checking Your Credit Score Lowers It
The short answer is: No, checking your own credit score does NOT lower your credit score. This misconception often stems from confusion regarding the different types of credit inquiries: hard inquiries and soft inquiries.
Hard Inquiries vs. Soft Inquiries: Knowing the Difference
The key to understanding the impact of checking your credit score lies in differentiating between hard and soft inquiries.
Hard Inquiries (Hard Pulls)
A hard inquiry, also known as a "hard pull," occurs when a lender or creditor checks your credit report to make a lending decision. This typically happens when you apply for:
- A loan (e.g., mortgage, auto loan, personal loan)
- A credit card
- An apartment rental (sometimes)
Hard inquiries can slightly lower your credit score, especially if you have several within a short period. Lenders interpret multiple hard inquiries as a sign that you are actively seeking credit, which might indicate financial instability or a higher risk of default. The impact is usually minor (typically a few points) and diminishes over time. Most hard inquiries stop affecting your score after 12 months and are removed from your credit report after two years.
Why do hard inquiries impact your score? Hard inquiries are a signal to potential lenders that you're taking on new debt. Credit scoring models weigh new debt applications as a potential risk factor.
Soft Inquiries (Soft Pulls)
A soft inquiry, also known as a "soft pull," occurs when you or a company checks your credit report for informational purposes. These types of inquiries do NOT affect your credit score. Soft inquiries happen when you:
- Check your own credit report or score
- Receive pre-approved credit card offers
- An employer checks your credit report for employment purposes (with your permission)
- An insurance company checks your credit report for underwriting purposes
Soft inquiries are not visible to lenders and are not factored into credit scoring models. They are solely for your information or for administrative purposes.
In essence, checking your own credit score is always a soft inquiry. Therefore, you can check your credit score as often as you like without worrying about lowering it.
Why Checking Your Credit Score is Important
While checking your credit score won't hurt it, it's actually a very important practice for maintaining good financial health. Here's why:
- Identify Errors: Regularly reviewing your credit report allows you to identify and dispute any inaccuracies that could be negatively affecting your score. These errors could include incorrect account information, mistaken identities, or even signs of fraud.
- Monitor for Fraud: Checking your credit report can help you detect fraudulent activity, such as unauthorized accounts opened in your name. Early detection allows you to take swift action to minimize the damage.
- Track Your Progress: Monitoring your credit score over time allows you to track your progress in building or improving your credit. It can motivate you to maintain good financial habits and make informed decisions.
- Understand Your Creditworthiness: Knowing your credit score gives you a better understanding of your creditworthiness and helps you anticipate the interest rates and terms you'll likely receive when applying for loans or credit cards.
- Plan for Future Purchases: If you're planning a major purchase, such as a house or car, checking your credit score well in advance allows you to identify any areas for improvement and potentially secure better financing options.
How to Check Your Credit Score and Report
There are several ways to access your credit score and credit report:
- AnnualCreditReport.com: You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year. This is the official website to obtain these free reports.
- Credit Karma and Credit Sesame: These websites offer free credit scores and credit reports, often updated regularly. They typically use the VantageScore model.
- Your Credit Card Statement: Many credit card issuers now offer free credit score updates as a benefit to their cardholders.
- Experian, Equifax, and TransUnion: You can purchase your credit score and report directly from these credit bureaus.
Pro Tip: Stagger your free credit reports from the three bureaus throughout the year (e.g., Equifax in January, Experian in May, TransUnion in September). This allows you to monitor your credit more frequently.
Tips for Improving Your Credit Score
If your credit score isn't where you want it to be, there are several steps you can take to improve it:
- Pay Your Bills on Time: Payment history is the most significant factor in your credit score. Always pay your bills on time, every time.
- Keep Credit Utilization Low: Credit utilization is the amount of credit you're using compared to your total available credit. Aim to keep your credit utilization below 30%. For example, if you have a credit card with a $1,000 limit, try not to carry a balance higher than $300.
- Avoid Opening Too Many New Accounts: Opening too many new accounts in a short period can lower your credit score due to the hard inquiries.
- Diversify Your Credit Mix: Having a mix of different types of credit (e.g., credit cards, loans) can positively impact your score. However, don't open new accounts just for the sake of diversification.
- Check Your Credit Report Regularly and Dispute Errors: As mentioned earlier, correcting errors on your credit report can significantly improve your score.
- Become an Authorized User: If you have a friend or family member with good credit, ask if you can become an authorized user on their credit card. Their positive payment history can help boost your score. However, be aware that their negative payment history can also negatively affect your score.
Conclusion
Don't let the fear of lowering your credit score prevent you from checking it regularly. Monitoring your credit score and report is a crucial part of maintaining good financial health. Remember that checking your own credit score is a soft inquiry and will not negatively impact your score. Stay informed, be proactive, and take control of your credit!
