Why Does Checking Your Credit Score Lower It?

One of the most common misconceptions about credit scores is that simply checking them will negatively impact your credit rating. This fear can prevent people from proactively monitoring their credit health, which is crucial for maintaining a good financial standing. Fortunately, this isn't entirely true. The impact on your credit score depends on *how* the check is performed and *who* is doing the checking.

Understanding Credit Inquiries: The Key to the Mystery

The confusion stems from the different types of credit inquiries: hard inquiries and soft inquiries. Understanding the distinction between these two is essential to dispelling the myth that all credit checks lower your score.

Hard Inquiries: The Ones That *Can* Impact Your Score

A hard inquiry, also known as a "hard pull," occurs when a lender or financial institution checks your credit report as part of a lending decision. This usually happens when you apply for credit products such as:

• Credit cards
• Mortgages
• Auto loans
• Personal loans
• Student loans

These inquiries are considered "hard" because they indicate to credit bureaus that you are actively seeking new credit. Each hard inquiry temporarily lowers your credit score, albeit usually by a small amount. The exact impact varies depending on several factors, including:

• Your overall credit history: If you have a long and positive credit history, a single hard inquiry is less likely to significantly impact your score.
• The number of recent inquiries: Multiple hard inquiries within a short period can raise a red flag for lenders, suggesting you might be overextending yourself financially.
• The strength of your credit profile: If you already have a low credit score, even a small negative impact from a hard inquiry can be more noticeable.

The effect of a hard inquiry is usually temporary. Most hard inquiries will disappear from your credit report after two years, and their impact on your score diminishes over time, typically becoming negligible within a year.

Soft Inquiries: The Safe and Sound Credit Checks

A soft inquiry, also known as a "soft pull," occurs when you or a company checks your credit report for informational purposes. These inquiries *do not* impact your credit score. Common examples of soft inquiries include:

• Checking your own credit report: Whether you use a free credit monitoring service, order your report directly from the credit bureaus (Equifax, Experian, and TransUnion), or use a service offered by your bank, these are always soft inquiries.
• Background checks by employers: Many employers run credit checks as part of their hiring process, but these are considered soft inquiries.
• Credit card companies sending pre-approved offers: When you receive pre-approved credit card offers in the mail, the issuer has likely performed a soft inquiry on your credit.
• Insurance companies checking your credit for policy quotes: Some insurance companies use credit information to assess risk, but these checks are soft inquiries.

Because soft inquiries are not related to applying for new credit, they are not viewed as a risk factor by lenders and do not affect your credit score. You can check your credit report as often as you like without fear of harming your credit.

Why Do Hard Inquiries Impact Your Score?

The reason hard inquiries can negatively impact your credit score lies in the risk assessment that lenders make. Multiple hard inquiries in a short period can signal that you are:

• Struggling financially: Applying for multiple credit products might indicate that you are having difficulty managing your finances and are relying on credit to make ends meet.
• A higher credit risk: Lenders might perceive you as a higher risk borrower if you are actively seeking credit from multiple sources.
• Potentially engaging in "credit churning": This is a practice of opening multiple credit cards to take advantage of rewards or introductory offers, which can be seen as a risky behavior.

Credit scoring models, like FICO and VantageScore, consider these factors when calculating your score. They aim to predict the likelihood that you will repay your debts on time. Frequent applications for credit can raise concerns about your ability to manage your debt responsibly.

How Many Hard Inquiries Are Too Many?

There's no magic number of hard inquiries that will automatically ruin your credit score. However, it's generally advisable to limit the number of credit applications you make within a short period. Applying for several credit cards or loans within a few weeks can be detrimental.

Instead, research your options carefully and only apply for credit products that you genuinely need and are likely to be approved for. Check your credit score and report *before* applying to get an idea of your approval odds.

Rate Shopping: An Exception to the Rule

Credit scoring models recognize that consumers often need to shop around for the best interest rates and terms when applying for significant loans, such as mortgages or auto loans. To accommodate this, they often treat multiple inquiries for the same type of loan within a specific timeframe as a single inquiry. This is known as "rate shopping."

The timeframe varies depending on the credit scoring model. FICO typically considers inquiries made within a 45-day period as a single inquiry, while VantageScore uses a 14-day window. This allows you to compare offers from different lenders without negatively impacting your credit score.

Tips for Minimizing the Impact of Hard Inquiries

Here are some strategies you can use to minimize the impact of hard inquiries on your credit score:

1. Space out your credit applications: Avoid applying for multiple credit products at the same time. Allow several months between applications.
2. Research and pre-qualify: Before applying for a credit card or loan, research your options and consider pre-qualifying for offers. Pre-qualification doesn't guarantee approval, but it gives you an idea of your chances. Many pre-qualification processes only use soft inquiries.
3. Shop around for the best rates: Take advantage of the rate shopping window by comparing offers from multiple lenders within a short timeframe.
4. Monitor your credit report regularly: Check your credit report periodically to identify any unauthorized or inaccurate information. You can obtain a free copy of your credit report from each of the three major credit bureaus annually at AnnualCreditReport.com.
5. Maintain a good credit history: The best way to mitigate the impact of hard inquiries is to have a strong overall credit history. Pay your bills on time, keep your credit utilization low, and avoid carrying high balances.
6. Only apply for credit you need: Avoid opening unnecessary credit accounts simply for the sake of building credit.

The Importance of Monitoring Your Credit Report and Score

While checking your own credit score won't lower it, monitoring your credit report is crucial for maintaining good financial health. Regularly reviewing your credit report allows you to:

• Detect errors and inaccuracies: Mistakes on your credit report can negatively impact your score. Disputing errors can improve your creditworthiness.
• Identify potential fraud or identity theft: Unfamiliar accounts or inquiries on your report could indicate that someone has stolen your identity.
• Track your progress: Monitoring your score allows you to see the impact of your credit management efforts.

Several free and paid credit monitoring services are available. Some credit card issuers and banks also offer free credit score monitoring to their customers.