For anyone trying to be smart about their finances, checking your credit score has become a regular habit. But you may have heard some unsettling rumors that taking a peek at your credit score can cause it to drop. Is this just an urban legend, or is there truth behind it?
The answer is: It depends on the type of credit check. While checking your credit score doesn't impact it at all, other types of credit checks can indeed cause a temporary dip. Here's a closer look at the different kinds of credit checks and how they can affect your all-important credit score.
Soft vs Hard Credit Inquiries
When it comes to credit checks, there are two main categories:
Soft Credit Inquiries
1. Generated when you check your credit report or score
2. Performed by companies looking to pre-approve you for offers
3. Has no impact at all on your credit score
4. Viewing your credit is your right as a consumer
Hard Credit Inquiries
1. Occur when a creditor reviews your report for a loan or credit application
2. Result in a temporary dip of a few points on your score
3. Multiple hard inquiries in a short period can be more damaging
4. Hard inquiries remain on your credit report for up to 2 years
As you can see, soft inquiries where you check your credit score pose zero risk. However, hard inquiries initiated by lenders can indeed cause a relatively minor credit score reduction. But why is this the case?
The Logic Behind Credit Score Dips
Credit scoring models like FICO factor in how many hard inquiries you have on your credit report. While a single inquiry may only cost you a few points, scoring models see multiple hard inquiries as a potential red flag that you are desperately seeking new credit - which could indicate high debt risk.
Additionally, hard inquiries remain visible on your credit report for up to 24 months. So seeking out too many new credit accounts in a short span can be interpreted as a negative signal about your financial stability.
However, it's important to keep these scoring penalties in perspective. According to FICO, a hard inquiry from a single lender is only expected to impact your score by less than 5 points. So checking credit card or loan rates from a few different banks shouldn't drastically hurt your score as long as you aren't applying everywhere.
Best Practices for Credit Inquiries
To play it safe and protect your hard-earned credit score, follow these tips:
1. Only apply for the credit you need and try to minimize hard inquiries
2. Rate shop for loans within a 14-45 day window (scoring models treat multiple inquiries for mortgages, auto loans, etc. as a single inquiry)
3. Check your credit reports regularly for any mistakes like unauthorized hard inquiries
4. Feel free to check your credit score as often as you'd like through bank tools, apps, free websites, etc.
5. Space out applications for new credit by 6+ months whenever possible
6. If your score did drop from hard inquiries, it should rebound within a few months as long as you don't accrue more
While a few points may not sound like much, maximizing your credit score is essential for qualifying for the best interest rates and terms on loans. And every small dip can add up over time. So continue tracking your credit vigilantly, just be sensible about limiting unnecessary hard inquiries that could do more harm than good.
Call (888) 803-7889 to check your credit score now!
Resource
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