Is it bad to check your credit score?

Your credit score is a crucial element of your financial life. It significantly impacts your ability to get approved for loans, mortgages, credit cards, and even rental apartments. With so much riding on this three-digit number, it's natural to be curious about its fluctuations. But the question often arises: is it bad to check your credit score? The short answer is generally no, but it’s essential to understand the nuances.

Understanding Credit Scores and Credit Reports

Before diving into the specifics of checking your credit score, let’s establish a clear understanding of what a credit score and a credit report are.

Credit Score: A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It's calculated using information from your credit report. The higher your score, the lower the risk you represent to lenders.

Credit Report: A credit report is a detailed record of your credit history. It includes information such as:

• Your payment history (on loans, credit cards, etc.)
• The amounts you owe
• The length of your credit history
• Types of credit you use
• New credit applications
• Public records (bankruptcies, judgments)

The Difference Between Hard and Soft Inquiries

The key to understanding whether checking your credit score is detrimental lies in differentiating between "hard" and "soft" credit inquiries.

Hard Inquiries

A hard inquiry (also known as a hard pull) occurs when a lender checks your credit report as part of a loan or credit application process. This typically happens when you're applying for:

• A mortgage
• An auto loan
• A new credit card
• A personal loan

Hard inquiries can potentially lower your credit score, but the impact is usually minimal and temporary. The effect typically lasts for a few months, and the inquiry usually falls off your credit report after two years. Multiple hard inquiries within a short period (e.g., when shopping around for a mortgage) are often treated as a single inquiry to avoid penalizing consumers who are comparing rates.

Soft Inquiries

A soft inquiry (also known as a soft pull) occurs when you check your own credit report or when a lender checks your credit report for pre-approved offers. Soft inquiries do not affect your credit score. Examples of soft inquiries include:

• Checking your own credit report through AnnualCreditReport.com
• Credit card companies sending you pre-approved offers
• Employers performing background checks (with your permission)
• Landlords running credit checks for rental applications (in some cases, this may be a hard inquiry – always ask)

Checking Your Own Credit Score: A Soft Inquiry

When you check your own credit score, whether through a free credit monitoring service or by requesting your credit report directly from the credit bureaus (Equifax, Experian, TransUnion), it's considered a soft inquiry. This means that checking your credit score will not negatively impact your credit score.

Why You Should Regularly Check Your Credit Score

Checking your credit score regularly is crucial for several reasons:

1. Identity Theft Detection

Regularly monitoring your credit report helps you identify suspicious activity that might indicate identity theft. Unauthorized credit card accounts, fraudulent loan applications, or incorrect personal information are all red flags that you should investigate immediately.

2. Accuracy of Credit Information

Mistakes can and do happen on credit reports. Incorrect payment history, inaccurate account balances, or outdated information can negatively impact your credit score. Regularly reviewing your report allows you to identify and dispute these errors, improving your score over time.

3. Understanding Your Credit Health

Checking your credit score provides a snapshot of your overall credit health. It helps you understand how lenders perceive you and identify areas where you can improve. For example, if your credit score is low, you can take steps to reduce your credit utilization ratio (the amount of credit you're using compared to your total available credit) or focus on making timely payments.

4. Monitoring Progress

If you're actively working to improve your credit score (e.g., by paying down debt or disputing errors), regularly checking your credit score allows you to track your progress and see the results of your efforts. This can be incredibly motivating and help you stay on track.

5. Preparing for Major Purchases

Before applying for a mortgage, auto loan, or other significant loan, it's wise to check your credit score to ensure it's in good shape. This allows you time to address any issues or inaccuracies before you apply, potentially saving you money on interest rates and improving your chances of approval.

Where to Check Your Credit Score

Several options are available for checking your credit score, some of which are free:

• AnnualCreditReport.com: You're entitled to one free credit report per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). While these reports don't include your credit score, they provide valuable information about your credit history.
• Credit Karma, Credit Sesame, WalletHub: These websites offer free credit scores and credit reports based on the VantageScore model. Keep in mind that these scores might differ slightly from your FICO score, which is the most widely used score by lenders.
• Your Credit Card Company: Many credit card companies offer free credit score monitoring as a perk to their cardholders. Check your card's benefits to see if this is an option.
• MyFICO: You can purchase your FICO score and credit report directly from MyFICO. This is the most accurate way to see the score that lenders will likely use.

FICO Score vs. VantageScore

It's important to note that different credit scoring models exist, the two most prominent being FICO and VantageScore. While both aim to assess creditworthiness, they use slightly different algorithms and weighting factors.

FICO Score: Developed by Fair Isaac Corporation, the FICO score is the most widely used credit scoring model by lenders. It's known for its accuracy and reliability.

VantageScore: Developed jointly by the three major credit bureaus, VantageScore aims to be a more consumer-friendly and accessible scoring model. It uses a slightly different scoring range (300-850, like FICO) and gives less weight to certain factors, such as past payment history. VantageScore also considers accounts with very short credit histories, which FICO previously ignored. This can be helpful for people new to credit.

While both scores are valuable, lenders often rely more heavily on the FICO score when making lending decisions. Therefore, it's essential to understand both your FICO score and your VantageScore to get a comprehensive picture of your credit health.

The Impact of Credit Utilization

One of the major factors affecting your credit score is credit utilization. Credit utilization is the amount of credit you’re currently using compared to your total available credit. It’s expressed as a percentage. For example, if you have a credit card with a $1,000 limit and you’ve charged $300, your credit utilization is 30%. Credit scoring models favor low credit utilization ratios, typically below 30%. Keeping your credit utilization low demonstrates responsible credit management and can significantly improve your credit score.

Improving Your Credit Score

If your credit score isn't where you'd like it to be, there are several steps you can take to improve it:

• Pay Your Bills on Time: Payment history is the most important factor in your credit score. Always pay your bills on time, every time.
• Reduce Your Credit Utilization: Aim to keep your credit utilization below 30%. Pay down your credit card balances regularly.
• Avoid Opening Too Many New Accounts: Opening too many new credit accounts in a short period can lower your average account age and increase the number of hard inquiries on your credit report.
• Keep Old Accounts Open: Even if you don't use them, keeping old credit accounts open can help improve your credit score by increasing your overall available credit and lengthening your credit history.
• Dispute Errors on Your Credit Report: Regularly review your credit report and dispute any inaccuracies you find.

Conclusion

Checking your credit score regularly is not bad for your credit. In fact, it's a crucial step in managing your financial health. By understanding the difference between hard and soft inquiries and regularly monitoring your credit report, you can protect yourself from identity theft, identify and correct errors, and track your progress towards improving your credit score. So, don't hesitate to check your credit score – it's a valuable tool for achieving your financial goals.