Checking your credit score, or having your credit checked will not have a negative impact on your credit score. However, multiple credit checks within a short period are likely to reduce your score in a negative manner. Here is how you can understand how credit inquiries work when it comes to your credit score and how much it drops.
What really is a credit check?
Whenever you make an application for any kind of credit, be it a credit card, an auto loan, a mortgage or even a cell phone contract, the given credit will pull your credit. This enables them to assess your credit risk and come up with the decision of whether to extend you credit.
A credit check enables the lender to retrieve your credit report from one or all of the three credit reporting agencies namely Experian, TransUnion, and Equifax. Your credit report provides details on your credit history, including:Your credit report provides details on your credit history, including:
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What kind of credit accounts you have, credit cards, loans etc.
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It’s the age and the status of all your accounts
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Your payment history
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Current balances
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Total credit limit one can get against the credit limit that is currently in use.
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Investigations done by the lenders
The information is used by the lender to determine whether or not you are likely to be a good credit risk.
Inquiries, Overlimit, Hard Inquiries, Soft Inquiries
There are two main types of credit checks/inquiries - hard inquiries and soft inquiries:There are two main types of credit checks/inquiries - hard inquiries and soft inquiries:
Hard Inquiries: Every time that you apply for a new credit, the credit provider performs what is referred to as a ‘hard inquiry’ or a ‘hard credit check’. The most negative impact of a hard inquiry is a slight drop in your credit score, and it will be reported for 24 months.
Soft Inquiries: Soft inquiry is when you or someone else is running your credit report and are not requesting new credit. Soft credit checks would include things like the various companies that might want to hire you or even insurance companies that may wish to make their deals with you or even when you conduct a credit check on your own. These won’t affect your scores in any way.
To what extent do inquiries affect your credit score?
Hard credit check can negatively impact a credit score, although the effect is not usually very significant. FICO and Vantage Score credit scoring models also distinguish inquiries made to your report in the past year by allowing a decreasing number of points for each successive inquiry.
According to FICO, here is the estimated point drop for each additional credit inquiry:According to FICO, here is the estimated point drop for each additional credit inquiry:
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1 Inquiry: 0-5pts.
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2 Inquiries: 0 – 10 points
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3 Inquiries: 0 to 15 points
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4 Inquiries: 0 to 20 points
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5 Inquiries: 0 to 25 points
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6+ Inquiries: 0-30 points
Even six inquiries in the past year would only reduce your score by a maximum of 30 points, as you can see. The majority of people experience a decrease of less than 5 points in response to the inquiry.
Inquiries Only Harm Scores for 12 Months
However, any hard inquiries that are made to your credit report will only impact your score for the next 12 months. Hence, they are ignored by the scoring models especially when determining your credit score.
Thus, if you have applied for an auto loan, mortgage and a credit card in one week, then all three will be considered separately and will affect the score. However, there negative impact on your score will only last for 12 months after which they will stop contributing to it.
More Questions than Answers? Worrying Signals as Such
While it may cause a minor points deductions to your score, if a lender notices many inquiries on your credit reports, it may arise other concerns. Reasons for concern include:
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Apprehension that you are stretching the organization’s credit capacity to the limit by applying for too much credit.
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Possible credit card limit utilization in case new credit rating is granted
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Higher perceived risk of missing payment if assuming debt responsibilities
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Some of the signs of the existence of financial problems may include the following.
Though the scoring difference may appear to be negligible after a given limit, the number of inquires can have an effect on the final decision about an application at the lender’s end.
Inquiry Combining Period: All Home & Auto Inquiries As One
Nearly all credit scoring models have what is referred to as “inquiry combining” policy for home and auto loan shopping. When a consumer is shopping for a mortgage or an auto loan, for instance, there is often a tendency to apply for credit from different lenders in order to compare the rates and the loan offers.
Equally, for mortgage and auto loan inquiries, all inquiries of that given type during a specific time that is 45 days for mortgage and 14 days for auto loans would be considered one inquiry.
Therefore, if a candidate has sought mortgage preapprovals from 3 different lenders within a 2 week period, the agency is likely to record it as a single hard inquiry rather than 3. This keeps mortgage or auto shopping from significantly depressing scores.
How to Verify If There is Any Hard Inquiry on Your Credit Report
You can check past inquiries and find out the number of hard credit checks you have on your credit reports by using free credit reports from annualcreditreport. com. Since it is the only source sanctioned by the government, its use is not counted as an inquiry.
You can also view inquires on credit reports which are offered by your credit card companies or on personal finance websites. As with the second strategy, merely looking at your own report will not be considered as an inquiry.
If at any point you see an inquiry from a place you do not know or recognize, this could be a sign of fraud or identity theft and you would have to look into it further and possibly freeze your credit reports.
Ways to Reduce Hard Inquiries When Applying for Credit
If you are planning to apply for major credit soon (auto loan, mortgage), here are some tips to minimize inquiries and score impacts:If you are planning to apply for major credit soon (auto loan, mortgage), here are some tips to minimize inquiries and score impacts:
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Shop rates from multiple lenders within a short time of 14 or 45 days to fully harness the power of inquiry combination
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Only accept credit card offers that are relevant to your needs and that you can afford
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Do not apply for financing from retailers/dealers unless it is necessary to do so.
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Ask for your rates from the lenders without getting a hard credit check first if possible
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Also, do not have loan applications for a long period but instead do it within a week or a month at most.
A few credit checks from large application providers, such as those for homes, automobiles, credit cards and other credit facilities, are usual and will not significantly harm your credit history. However, do not undertake too many inquiries that will not be all that useful in the long run.
