Whenever you take any form of credit for example credit card, car loan, mortgage among others, the credit reporting agency will be used to help the lender decide on whether to approve your credit or not. But will just letting a lender or credit card company check or pull your credit really lower your score? This is an important question for consumers who want to ensure that their credit score is in good standing.
What is a Credit Check and why is it Important?
When you request new credit, the card issuer has to assess your creditworthiness to ensure that you will be able to repay the amount that you borrowed. To do this, they obtain a copy of your credit report from one or more of the three major consumer credit reporting agencies – Equifax, Experian, and TransUnion. It enables them to revisit details such as your payment history, the number of credits, the length of your credit history, the types of credits you have, and credit checks made recently.
Contrary to what many people believe, your credit report does not contain your credit score in figures. However, the information provided in the credit report is used to arrive at the credit score by a credit scoring model. Thus, by asking for your credit report, they are also able to review your current rating.
Hard Inquiries
Soft credit check: The one that occurs when you review your credit report or when a lender is considering you for a loan, is a hard credit check. Hard inquiries occur when you apply for credit, including credit cards, auto loans, mortgages, or apartment rentals. These types of credit checks enable the lenders to have a glance at the entire credit report to which the application is being subjected.
It is important not to have too many hard inquiries within a short time because it can reduce your score slightly. Almost all credit scoring models consider the hard inquiries in the process of calculating your score. However, one inquiry is not going to reduce your score by a very large amount.
Soft Inquiries
You also have soft inquiries on your credit report. Soft inquiries happen when you pull your own credit report or an employer does so with your consent. Other examples of soft inquiries are the preapproved credit card offers you get in the mail or pre-qualification check for loans.
Soft inquiries do not have any impact on your credit rating at all. The inquiries that can affect your credit score include only those that are hard and these are usually associated with applications for credit.
Hard Inquiry and It’s Implications
In most cases, a single hard credit inquiry will not cause your credit score to drop significantly. It is a general observation that for majority of consumers who boast a good, fair, or excellent credit score, the drop is normally within a range of around 5 points or lower. People with lower credit scores will be more capable of a somewhat deeper decrease in score due to any hard inquiries. However, this impact is normally not very significant. According to a FICO study, less than 10 percent of consumers experience their score decrease by more than 10 points due to the application for new account.
Single inquiry is not going to impact your approval rating for new credit either at present time or in the future. It is important to know, though, that multiple hard inquiries within a short time period will add up to a larger total but most lenders are aware of rate shopping. FICO counts multiple automobile, mortgage, or student loan inquiries within a 45-day period as a single inquiry. Thus, each time you shop for rates from several lenders, your score is not hit that often.
Like the effects of a hard or soft inquiry, any harm done also disappears with time as well. It stays on a credit report for two years, but FICO no longer considers any inquiries made after one year from the time of reporting while determining your score.
Strategies to Prevent or Diminish the Effect
If you need to open a new credit card or apply for a loan, you can take a few steps to reduce unnecessary dings to your credit from too many hard inquiries:If you need to open a new credit card or apply for a loan, you can take a few steps to reduce unnecessary dings to your credit from too many hard inquiries:
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Never apply for credit that you do not need now or in the near future. Do not open many new accounts for credit cards within a short time period. Many can mean high risk even if shopping rates.
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Allowed to rate shop only within a 45-day period. FICO rating of auto, mortgage or student loan requires all inquiries made within 45 days to be considered as one inquiry only.
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Zone applications over time. Do not apply for new credit within a short time frame as this will cause many hard inquiries to be reported within the period.
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It is also a good idea to review your credit report and score from one more credit bureaus before applying to see if there are any negative entries. Keeping track of your score can enable you to avoid applying for new credit that may bring down your score if you so desire.
The Takeaway
There is really no harm in doing credit checks on yourself or in giving permission to creditors and lenders to look at your credit information for application purposes. A single hard pull usually has a slight negative effect of a credit score, which is not usually more than 5 points. The effect is likewise temporary. As for credit monitoring or getting approval for credit, the advantage usually surpasses the minor hit that you take on your score. It is important to remind here that hard inquiries from legitimate lenders should not pose a problem as long as you occasionally review your own credit report and apply for credit only when necessary. It does not affect your overall credit score and thus does not influence your credit-worthiness when applying for loans in the long run.
