Do Credit Checks Affect Your Credit Score?

Does Credit Check Impact Credit Rating

Should you apply for a credit card, personal loan, vehicle loan, or mortgage, most likely the organization will review your credit report throughout the application process. Still, does this credit check itself lower your credit score? Most customers ask themselves this often, particularly when they are seeking for a new credit. The quick response is that, albeit slightly and for a limited time, credit checks do affect your credit score.

Understanding some fundamental principles concerning credit checks and their impact on your credit score can help you.

Types of Credit Checks

Two main types of credit checks are soft and hard credit checks. When you let creditors review your credit, for example when you decide to apply for a certain credit card, soft credit checks—also known as soft inquiries—are commonly undertaken by them. It is therefore crucial to underline that your credit score is not affected by gentle queries. Hard inquiries—that is, those in which a company, say, when you apply for a loan, ask for your credit score without your permission. Although hard queries have no direct effect on the credit score, they might momentarily and marginally lower it.

Credit inquiries, more specifically, hard inquiries

When you apply for credit, for instance, a mortgage, auto loan, or credit card, the credit provider pulls your credit report and looks at your credit score, and this is known as a hard search. This is because if a credit seeker engages in too many inquiries in a short duration, the credit bureaus are likely to refer to him or her as a high-risk taker, which is likely to lower the FICO score or any other model used.

A consumer credit reporting agency known as FICO explained that one hard inquiry often reduces a credit score by a maximum of 5 points. However, it tends to decline if no other inquiries build on it or if no subsequent questions are added. Inquiries can remain on your report for as long as two years, though FICO only counts them for one year. Your score can bounce back in a few months provided all other aspects of your credit report are well maintained.

Hard checks are not allowed more than the permitted predetermined number in a given timeframe.

It is however important to note that credit scoring models do permit a certain degree of comparison with competitors. For instance, multiple inquiries such as auto loan inquiries done within a specific time frame amount to one hard check rather than several hard checks. FICO permits rate shopping as far as inquiries have been within 45 days. VantageScore is valid for 14 days. Pulling your credit report or your credit score is something that is not considered an inquiry. Other monitoring services from such companies as Experian do not necessitate hard inquiries either.

Overall, it is fine to have a reasonable number of inquiries especially when one is responsibly maintaining lines of credit and it does not significantly harm a good credit score. However, applying for a lot of new credit in a short period is looked at as a higher risk and will cost the applicant slightly more points.

Balancing the Need for a Credit Check

Not every business transaction that an individual or an organization enters requires the scoring of a hard credit check. At other times, you may have to consider possible ways of avoiding inquiries where possible. For example:

Cell Phone Contracts – Most cell phone companies do not pull hard inquiries so long as you provide a deposit.
Utilities – Credit references for utility accounts are softer inquiries and do not always require inquiries on credit reports; they may be created by paying a deposit or presenting evidence that one has a good payment history with the utility company under which a new account is being opened.
Rental Homes/Apartments – While most landlords consider credit scores, some individual landlords do not consider credit reports of the clients but other details such as past receipts of rental payments. Most large apartment complexes perform what is referred to as tenant checks.
General Employment – The majority of employers do not run credit checks on their employees unless the need arises as per the nature of the job. Employment credit checks are more frequent when the position to be filled provides credit authority.
Security Deposits – Similar to the above, other credit-building products such as secured credit cards do not involve hard credit checks but require users to deposit an amount of money equal to the desired credit limit.

Promotional Exceptions

Sometimes, the lenders allow some flexibility to minimize the appearance of hard inquiries especially during certain financing offers. For instance, car makers may offer 0 percent APR on auto loans for some months and do not necessitate hard credit checks when approving applications for credit cards or when the customer has a prior lending history with the dealerships. This creates slight flexibility that enables the commencement of the process without affecting the score. Still, the hard inquiry would probably be made at the time of buying the car eventually. The pre-approval terms may also change if the application you submit does not depict your credit file.

Soft Inquiry Alternatives

In cases where there is a choice between soft checks as opposed to hard inquiries, the former will not impact the credit score. For example:

Pre-Approved Credit Card Offers – Credit card companies may prescreen the consumer for these promotional offers by conducting soft pulls on your credit information stored in their databases. It does not constitute a hard inquiry when the consumer responds to their pre-qualified offers given that additional credit information may be sought.
AnnualCreditReport.com – The Fair Credit Reporting Act states that you can get your three major credit reports once a year without charge. AnnualCreditReport.com offers the function to request your annual reports from Equifax, Experian, and TransUnion without a hard credit check.

Some of the banks and lenders may use soft inquiries to give estimated interest rates and the loan amounts one may be qualified for. However, a hard credit check is still typically done during the official application process stage.

Monitoring Your Credit

This way, you can monitor inquiries as and when they happen, as well as any corresponding changes to your scores. Monitoring also makes sure that any credit mistakes are corrected to prevent not only short-term score effects but long-term ones as well. Free credit tracking options or paid monitoring services offer occasional or more frequent updates of your most recent credit information.

The number of hard inquiries made on your account for the last year will be among the total parameters that are the basis of your credit score. However, a few inquiries regarding the proper ways of applying for more of the available credit should not have long-term effects on an individual. Hard checks should only be made when one has a critical need for credit, especially for important loans or credits, as opposed to applying for credit offers as received to reduce the negative effects. In case of having a plan to make a significant financing decision, it is advisable to set aside the applications to be completed at some time so that the influence of back-to-back inquiries is not felt.

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