If you run a credit report or get your credit score, your score is likely to drop at the end of the process. This can be misleading since it is expected that one should be checking their credit responsibly as a way of maintaining good credit. Well, why does this particular action lead to a deduction of the score? Here are some of the causes that precipitate it.
Hard Inquiries
Inquiries include the times you check your credit report or credit score using any of the three major credit bureaus namely Experian, Equifax, and TransUnion, then you fall under this category of hard inquiry. While there are other types of inquiries, hard inquiries are those that include credit checks during the application processes such as when one is applying for a loan or a credit card. Inquiry that does not affect a person’s credit score includes when you personally check your credit report or when your report is pulled for pre-approved credit card application.
However, when a hard inquiry appears on your report, it means that you have recently applied for more credit actively. This is due to the fact that inquiries about credit indicate that you may be in need of more credit or loans and therefore increase your perceived risk slightly. Typically, the score reduction is minimal; it can drop by as low as five points or even less after a single hard inquiry. However, when rate shopping, many hard inquiries in a short time frame are considered to be just one inquiry.
Lower Average Account Age
Amount owed, that is the total amount of money, which you owe and the amount of money you are allowed to borrow, constitutes roughly 10 percent of your FICO credit score. As a general rule, the longer the average account age, which in this case is at least 3 months, the better in terms of your score. When you check your own report, it does not influence the reduction of the average age in a direct way. However, it does combine with all your other hard inquiries to give the impression that you have been applying for more credit in the recent past.
The average age of credit accounts usually declines when new accounts are opened, so checking your credit report might indicate increased credit activity. Bear in mind that the change is relatively small unless you start the utilization of new accounts. A good length of credit history combined with one or two high-limit older credit cards will usually be valued more than a few new credit accounts. It is wise to diversify the utilization of both old and newer credit products responsibly to build that kind of credit history.
Potential Score Version Differences
It is important to note that there are dozens of different credit scoring models and versions. If you obtain your credit report directly from Experian, Equifax or TransUnion, then the score provided is your FICO score. Some lenders may consider different versions of FICO score or even VantageScores to take credit decision.
The version they check as a consumer may not be the same as the one a lender pulls later on. This means that you may get a difference in the score of 10-20 points just because of the different version of the scoring model. It is, however, possible to get useful trend insights when monitoring the same score source over a period.
Timing Differences
Besides, model differences, your score can vary slightly from day to day due to certain changes in your credit data and activity. For instance, the balances reported on credit cards might pull down scores as soon as a particular month. However, as you reduce balances once more, the scores do the same.
Even if you do not make any alterations in your financial conduct, timing can lead to small deviations. When you refresh the score several times in a row, you will find it few points down simply because of these short term timing factors coupled with multiple hard inquiries. By spacing out direct checks several months apart, one gets a more useful long term perspective.
The Inquiry Remains for 2 Years
Whenever you do a hard search on your file alone, it shows on your reports for two years to other lenders. But its impact on your scores is negative and reduces over time as you gain more points. FICO models take only the inquiries of the last 12 months, while it stays in your full reports for 24 months by the laws of fair credit reporting.
After the second year of the inquiry, the effect reduces monthly because the hard inquiry is older than 12 months. Some say that FICO actually considers a hard inquiry fully for 12 months, while others claim that the negative influence begins to diminish 6 months from the date of the inquiry As with many things credit-related, do not stress over this timeline too much, because one inquiry may not matter much or may only have a brief effect unless you have multiple inquiries within a few months.
Measuring the Cost of Implementing the Inquiry Against Its Benefits
Yes, hard inquiries when you check your own file do have a slight short term negative impact in most cases when done individually. But think about the circumstances and whether learning your current credit rating is worth the positive effects of a small hit. It assists in identifying discrepancies, fraud, creating good credit history to qualify for better rates hence; monitoring your reports is essential.
As hard inquiries stay full two years either way, it is only the number of inquiries that is different in one scenario from the other.
