Why Does Checking Your Credit Score Lower Your Score?

Understanding your credit score is crucial for financial well-being. It affects everything from loan interest rates to your ability to rent an apartment or even get a job. Naturally, you might want to check your credit score regularly. But you might have heard a worrying rumor: checking your credit score lowers it. Is this true? The answer is a bit more nuanced than a simple yes or no. Let's dive into the details of credit scores, credit inquiries, and how they affect your financial health.

Understanding Credit Scores and Credit Reports

Before we delve into the impact of checking your credit score, let's clarify what a credit score and a credit report actually are.

• Credit Score: A three-digit number (typically ranging from 300 to 850) that represents your creditworthiness. It's calculated based on information in your credit report and used by lenders to assess the risk of lending you money. Higher scores indicate lower risk, leading to better loan terms. The two most commonly used scoring models are FICO and VantageScore.
• Credit Report: A detailed record of your credit history, including your payment history, outstanding debts, credit accounts, and any bankruptcies or collections. Credit reports are maintained by three major credit bureaus: Equifax, Experian, and TransUnion.

Factors Influencing Your Credit Score

Several factors contribute to your credit score. Understanding these factors will help you manage your credit effectively and improve your score over time:

1. Payment History (35% of FICO score): This is the most important factor. Paying your bills on time, every time, is crucial. Late payments, even by a few days, can negatively impact your score.
2. Amounts Owed (30% of FICO score): This refers to the amount of debt you owe relative to your available credit. A low credit utilization ratio (the amount of credit you're using compared to your total credit limit) is beneficial. Aim to keep your credit utilization below 30%, and ideally below 10%.
3. Length of Credit History (15% of FICO score): A longer credit history generally leads to a higher score. It shows lenders that you have a track record of managing credit responsibly.
4. Credit Mix (10% of FICO score): Having a mix of different types of credit accounts (e.g., credit cards, installment loans, mortgages) can be a positive factor.
5. New Credit (10% of FICO score): Opening multiple new credit accounts in a short period can lower your score, as it might signal to lenders that you're taking on too much debt. This is where credit inquiries come into play.

The Role of Credit Inquiries

Credit inquiries occur when someone requests to view your credit report. There are two main types of credit inquiries: hard inquiries and soft inquiries.

Hard Inquiries (Hard Pulls)

A hard inquiry, also known as a hard pull, happens when you apply for a new line of credit, such as a credit card, loan, or mortgage. The lender pulls your credit report to assess your creditworthiness. These inquiries are recorded on your credit report and can potentially lower your credit score, especially if you have multiple hard inquiries in a short period. Each hard inquiry typically only lowers your score by a small amount (usually less than five points), and the impact diminishes over time.

Why do hard inquiries affect your score? Lenders view multiple hard inquiries as a sign that you might be desperate for credit or taking on too much debt. This perceived risk can lead to a slight decrease in your credit score.

Examples of situations that result in a hard inquiry:

• Applying for a credit card
• Applying for an auto loan
• Applying for a mortgage
• Applying for a personal loan

Soft Inquiries (Soft Pulls)

A soft inquiry, also known as a soft pull, occurs when you check your own credit score or when a company checks your credit for pre-approval offers or background checks. Soft inquiries are NOT recorded on your credit report in a way that lenders can see, and they DO NOT affect your credit score.

These types of inquiries are considered "soft" because they're not associated with an application for new credit. They're more for informational purposes or preliminary assessments.

Examples of situations that result in a soft inquiry:

• Checking your own credit score through a credit monitoring service or directly from a credit bureau.
• Pre-approved credit card offers.
• Background checks by employers (with your consent).
• Insurance companies checking your credit for policy quotes.

So, Does Checking Your Own Credit Score Lower It?

The short answer is: No, checking your own credit score does NOT lower it. When you check your own credit, it results in a soft inquiry, which has no impact on your credit score. The myth that checking your credit hurts your score likely stems from confusion with hard inquiries, which *can* temporarily lower your score.

It's essential to monitor your credit report regularly to detect errors, potential fraud, or identity theft. Many services provide free access to your credit report and score, allowing you to stay informed without negatively affecting your credit.

How to Check Your Credit Score Without Hurting It

There are several ways to check your credit score regularly without worrying about negatively impacting it:

1. AnnualCreditReport.com: You're entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year. This is a great way to review your credit history for accuracy. While it doesn't automatically provide your score, understanding the contents of your report is vital.
2. Credit Card Statements and Online Banking: Many credit card companies and banks now offer free access to your credit score as a perk of being a customer. This is often updated monthly.
3. Credit Monitoring Services: Several companies provide credit monitoring services that track your credit report and alert you to any changes, such as new accounts, inquiries, or late payments. These services often include access to your credit score. Be sure to compare pricing and features before subscribing.
4. Free Credit Score Websites: Several websites offer free credit scores. However, be cautious about these services. Some may require you to sign up for a trial period and then charge you a monthly fee. Always read the terms and conditions carefully before providing your personal information. Credit Karma and Credit Sesame are examples of generally reputable services.

Tips for Maintaining a Healthy Credit Score

Beyond just checking your score, proactively managing your credit is crucial for long-term financial health. Here are some tips to keep your credit score in good shape:

• Pay Bills on Time: Set up automatic payments or reminders to ensure you never miss a due date.
• Keep Credit Utilization Low: Aim to use less than 30% of your available credit on each credit card. Ideally, keep it below 10%.
• Diversify Credit Accounts: Having a mix of credit cards, installment loans, and other types of credit can be beneficial.
• Avoid Opening Too Many New Accounts: Each new credit account can lower your average account age and lead to hard inquiries.
• Monitor Your Credit Report Regularly: Check your credit report at least once a year for errors or signs of fraud.
• Don't Close Old Credit Cards: Even if you don't use them, keeping old credit cards open (as long as there are no annual fees) can increase your available credit and lower your credit utilization ratio.
• Dispute Errors: If you find any inaccuracies on your credit report, dispute them with the credit bureau immediately.

The Importance of Regular Credit Monitoring

Regular credit monitoring is an essential part of financial responsibility. It allows you to:

• Detect Errors: Mistakes happen. Credit reports can contain errors that negatively impact your score. Monitoring allows you to identify and dispute these errors promptly.
• Prevent Fraud and Identity Theft: Early detection of unauthorized activity can minimize the damage caused by fraud or identity theft.
• Track Progress: Monitoring your credit score allows you to track the progress of your credit-building efforts.
• Stay Informed: Being aware of your credit standing empowers you to make informed financial decisions.