Any time you apply for any kind of credit, be it a credit card, auto loan, a mortgage, or even an application for a cell phone, the provider of the credit will get your credit report. This makes it possible for them to assess your credit worthiness and decide whether to extend credit to you and if so, then at what rate.
However, most individuals are unaware that even if a lender is authorized to run a credit check on you, this action will reduce your score. Here’s a glance at how credit checks affect your score and how much of an impact they do.
Hard Inquiries Lower Your Score
There are two types of credit check: a soft credit check and a hard credit check. Soft inquiries do not impact your credit score in any way. These are normally carried out by you when you are analyzing your own reports or by a lender when they wish to market pre-screened credit products to you. Nevertheless, the hard inquiries have the effect of causing your score to decrease.
In general, if you are making an official request and submitting your credit report to a specific lender, this is considered a hard inquiry. The activities that cause hard inquiries are applying for a credit card, mortgage, auto loan or personal loan and so on. Every hard credit check reduces your score by several points.
Multiple inquiries within a short span of time are considered unsafe.
Usually, one hard credit check does not decrease your score significantly at most a few points. However, since the scoring models determine your score according to the level of risk you pose to lenders, having many recently opened accounts or inquiries indicates higher risk.
This is why applying for a lot of credit at once can be a huge detriment to your score a lot more than the size of the credit card limit in relation to your credit utilization ratio. For instance, if you apply for three new credit cards within a month, that can lower your score by 10-20 points or even more. It makes lenders wonder why you need more credit than what you were taking previously at such a moment.
Inquiries Remain on Your Report for Two Years
The implications of the tough credit check are not felt for a short time. Hard inquiries are also Conducted on your credit report and they take 24 months to be removed. They can influence your score most in the first year. Nevertheless, one can still have a large number of inquiries older than 12 months but less than 24 months of age.
This goes to mean, that if over a certain period of time, one applies for many credit accounts, then after being granted the credit, the credit score may take as long as two years to be rehabilitated, even if the new credit account is run well. This is useful if you are expecting to apply for a big loan for a product that you need such as a house or a car. They should also ensure they do not apply for other credit at that time.
It also revealed that having too many accounts has negative effects on scores.
Well, apart from the hard inquiries which definitely cause the score to go down when checks are being run, number of new accounts also plays a part. This part of your score usually matters more.
It is better for the credit report to have lower number of credit accounts with the longest payment history than having large number of new accounts. If you open a lot of new accounts — even if you pay them off every month — most credit scoring models will consider it riskier than maintaining a few old accounts with a good payment history.
It is equally important that you regularly review your credit report to ensure that the information contained in it is accurate.
Due to the reason that credit checks lower your score for a brief period of time, it is advisable to monitor your credit reports frequently to avoid being shocked to find fraudulent accounts linked to your credit file. One of the signs of identity theft is having accounts that you did not open yourself.
You can also obtain your credit reports for free at least once per year at annualcreditreport. com without it harming your scores. You should also do your credit check several months before you apply for a big loan so that you have enough time to sort out any issues that may affect your chances of approval.
Some factors that affect your scores and are likely to have more weight include:
As for new credit checks and accounts, they lower your scores, but other elements affect your credit more. Things that impact your scores more include:
Things that impact your scores more include:
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Late payments – This can be damaging much more than inquiries.
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credit card utilization – higher balances compared to the credit limit results into lower scores.
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Credit history length – A longer credit history with positive entries has a positive impact on scores.
- Credit mix – Scores generally allow some level of credit utilization across different credit types.
Therefore, if you have a good credit standing, limit yourself to checking your credit once in a while, space your credit application over time and ensure you make your payment on time, the impacts of checking your credit scores should not be very devastating. Thus, the principle of being an educated credit consumer to manage credit through major credit decisions and major life events involving new credit obligations.
