Depending on the kind of credit that you seek, including a credit card, an auto loan or a mortgage, the credit provider will usually pull your credit report. However, does this credit check reduce the credit score? The short answer is normally only for the short term. Here is a closer look at how credit checks affect your credit scores and what you should be aware of.
This is where the difference between hard credit checks and soft credit checks comes in
Credit checks are of two main kinds namely the hard credit check and the soft credit check. The differences between them are important:The differences between them are important:
Hard Credit Inquiries Hard credit check is conducted when one applies for credit such as credit card, auto loan, mortgage or any other kind of a loan. Hard inquiries enable the creditors to look at your entire credit report to know whether or not they will agree to lend money to the applicant or not if they agree then they get to decide on the interest rates.
While hard inquiries do not have a long-term impact on your credit score, they may cause it to drop slightly, usually by a few points. This is because applying for new credit can be perceived as a risky move and hence credit seekers are turned down by lenders. However, the effect of a single new hard inquiry is not typically severe, and your score should recover within months.
The problem with a large number of hard inquiries within a short time frame is that it suggests higher risk and results in a more substantial decrease in the score. As a rule of thumb avoid using hard credit checks more than once or twice in a year.
Soft Credit Inquiries A soft credit inquiry is made when you review your own credit report or when a lender does this without your consent. For instance, a soft pull is made when your current credit card company pull your credit report to inform you if you are eligible for a higher credit limit.
Soft inquiries, on the other hand, do not affect your credit score in any way at all. Soft inquiries are not penalized by lenders because consumers need to keep tabs on their credit reports and scores.
How Long Does Credit Inquiries Affect Credit Scores? Most negative credit report information stays on your report for years, but the impact of hard inquiries is shorter:Most negative credit report information stays on your report for years, but the impact of hard inquiries is shorter:
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Equifax and Experian credit reports maintain hard inquiries for 24 months.
- When getting Transunion reports, hard inquiries last for one year on the credit check.
Nevertheless, inquiries only contribute a very small fraction to the entire score. Generally, the impact fades after 3-6 months of its appearance, although the record remains on your credit report for up to two years.
How Many Points Does Check Credit Lower Your Score?
Okay, but just how many points can a hard check on your credit negatively affect on the score? The answer varies depending on your specific credit situation, but for most people here's an estimate:The answer varies depending on your specific credit situation, but for most people here's an estimate:
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In the case of excellent credit (scores of 780 and above), only a single hard inquiry will result in a negligible change or at most a drop of 1 to 5 points.
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For those with excellent credit (credit scores ranging from 670 to 780), you may witness a 5-10 point decline.
- Those with fair credit, ranging between 580 and 670, can expect their credit score to drop by between 10 and 20 points.
The greater the number of inquiries, the more points you can expect your score to be pulled down. In other words, if you have applied for several new credit lines recently that could potentially decrease your score by a more significant margin than a single inquiry will.
The amount your score drops also varies depending on which credit scoring model is used: FICO or VantageScore . It is common knowledge that FICO scores are affected compared to VantageScores.
On the bright side, credit inquiries contribute to only 10% or less of your FICO credit score. Payment history and amounts owed to lenders account for a much larger part of your credit score. Moreover, credit inquiries that have
Under what circumstances are credit checks appropriate?
Even though credit inquiries do affect your rating a little, in most cases they are quite essential in achieving your goals and objectives. Here are some instances where a small temporary drop in your credit score is worth a hard inquiry:Here are some instances where a small temporary drop in your credit score is worth a hard inquiry:
Applying for credit cards with great rewards, points, and perks: Inquiries are indeed made when new credit cards are opened but it is usually worth it. Just think, analyze the opportunities and don’t apply for the cards that you don’t really need, consider all the rewards and choose the most suitable ones.
Taking advantage of low interest rates on a mortgage, auto loan, or personal loan: In most instances, when the interest rates are low it could be the right time to apply for lower interest rate financing which could really help cut down on the amount spent on interest throughout the lifecycle of the loan.
Applying for a credit limit increase: Access to increased credit limits can also facilitate the maintenance of low credit utilisation and high credit scores. Do not frequently request higher limits unless it is very necessary for you to do so.
There are several things that can be done – be more picky when it comes to which inquiries you submit, don’t do too many hard checks per year, and if you have to submit requests, do it when your credit profile is the best to counter balance the drop.
Many factors have been pointed out that contribute to the negative effects of credit check on the consumers; it is therefore important to reduce the impact of credit check.
If you need to apply for new lines of credit, there are a few things you can do to reduce the negative impact of hard inquiries:If you need to apply for new lines of credit, there are a few things you can do to reduce the negative impact of hard inquiries:
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Do not apply for credit that is unnecessary or that you cannot afford to pay back. Each new account increases the amount that you can become indebted and proves to the lenders that you need more credit.
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Do not overload the organization with too many inquiries within a spike period, therefore applications should be space out at least three months apart.
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If engaged in rate shopping for a major loan such as a mortgage or auto loan, ensure that it is done within a short duration of about 14-45 days. The credit bureaus understand this as just one search for the best loan rates, and not multiple inquiry events.
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Please, do not use third parties to request your credit reports and do not apply for credit cards or loans in the period before your free credit reports are generated.
- Pay your credit card and loan bills on time – the most important aspect that determines credit scores. When considering the application for new credit, avoid making payments after the due date in the various months of the credit cycle.
As long as some precautions are taken in planning the inquiries and being financially responsible, you can have the benefit of new credit while not having to worry about your credit score falling due to new inquiries.
