Does A Credit Check Affect Your Credit Score?

Can a credit check impact your credit score?

Whenever you make an application for any credit like a credit card or auto loan or even a mortgage, the credit reporting agency is usually asked by the credit provider to report on you so that they can decide whether they should approve you or not and if yes, then what conditions they should give you. You might be curious if those credit checks that you allow when applying for credit affect credit scores in any way. This is a question that many consumers have time and again regarding the credit scoring process.

The Short Answer

There is always a slight and temporary decrease in your credit scores when a credit check is conducted, especially if it is reported as a hard inquiry, but it usually does not take long for the scores to bounce back. However, if there are lots of inquiries on your reports within a short period, then you may find that your scores reduce more.

Nevertheless, do not be discouraged by credit checks every time you seek credit for the things you need. It is essential to create a favorable credit mix in your financial life. However, it is recommended to apply for credit only when you require it and when you are sure that you will be able to manage it well.

The impact of credit inquiries on credit scores

When you apply for a loan or credit card, the company approves or declines your application based on your credit history. This leads to an inquiry appearing on your credit report at least at one of the three credit reference agencies namely Experian, Equifax, and TransUnion.

The inquiries that you allow when you apply for credit are usually referred to as “voluntary” inquiries. Another type is the receipt of inquiries from creditors, who may occasionally access your credit report to revise your accounts with them. But you do not start those, thus voluntary inquiries will be the thing we will address here.

Some voluntary credit inquiries do not impact your credit scores in any way. They also found that merely checking your credit reports and scores has no relevance. It’s only the inquiries made by the creditors that could potentially lead to a new line of credit to be created and included in your reports and hence be used in the credit scoring process.

All three credit score models look at inquiries somewhat differently. But here is a look at how FICO, the most commonly used model, handles them.

• Credit inquiries may remain in the credit reports for up to two years but are used in scoring for only one year.
• FICO groups all of the inquiries made within the 45-day window into a single inquiry to help suppress the effects of rate shopping. Well, comparing interest rates of several financial institutions to obtain a good deal on a loan seems to be one credit check only.
• Inquiries, in the overall FICO credit score, are only about 10%. One study conducted a few months ago revealed that the new inquiry reduced the five points by 56% or less. Again, only 24% had a decrease of 10 points or more.
• FICO makes them pay more for rate shopping for multiple types of credit (a mortgage, auto loan, and credit card) rather than one type of loan.

The effect of inquiries on your scores also declines with the number of recent inquiries that appear on your credit report. The first applicant with only one inquiry observes a greater decline in the score, compared to the applicant with six inquiries within the same period.

Though after credit checks, dings remain on the credit reports and scores for as long as 24 months, they are not as important in the long run. Credit scoring models acknowledge rate shopping as something normal. In as much as the rest of your credit profile is healthy, minor dips due to inquiries within the permissible limits will take 6 to 12 months to heal.

You May Minimize the Impact by Comparing Rates in a Short Timeframe

If you are in the market for a larger loan, such as a mortgage, an auto loan, or a private student loan, it will be beneficial to get several quotes to find out which is the best rate for you. Fortunately, credit scoring models do understand that it is acceptable to rate shop for large loans. This means you can reduce the ding to your scores if you do rate comparisons within a short period.

As mentioned earlier, FICO groups all inquiries within 45 days so they are considered as one. There are other credit scoring models and the same rules apply as well. This way, if you are comparing lenders, and it takes about a month and a half or so, you are not getting multiple, different hits on your reports and scores for each application. Bear this in mind the next time you are out shopping for any big loan.

What If You Have a Lot of Recent Credit Checks?

Whereas applying for rates for one loan type may not have much of a lasting impact, where you apply for multiple forms of credit like a mortgage, car loan, or credit cards it will be considered an issue. Their primary concern is whether you can manage that much new credit. Therefore, they might reject your applications or provide worse conditions.

However, if you have quite a few recent inquiries because life happened and life happened to throw several expensive things your way at the same time (for example, you needed to repair your house and car and then you had medical bills), then it is alright. But lenders still have to answer the question as to whether more leverage is all that risky. It can help lenders calm down if they discuss their situation with you before applying for the applications.

Explaining any inquiries that appear suspicious, down payments, and proving that you are capable of meeting other obligations will be of aid. If you have been rejected by lenders initially, do not apply again before at least 6 months when the inquiries will disappear from your reports and if you have been making on-time payments during that time. Do not look for credit, which you will not be able to receive until you get approval for the necessary loans first.

Inquiries When You’re Rate Shopping Won’t Hurt Your Credit Scores As Much

Concerning rates comparison many consumers fear that comparing with many providers the score will be harmed. However, the studies indicate that in normal-rate shopping situations, the declining score is normally small. It is not unusual for your score to drop 10-20 points if you applied for a mortgage with three different lenders, as compared to 5 points if you only applied with one lender.

That small temporary drop need not prevent you from shopping for the best loan rate. It is better to try to compare rates in a short period so that credit bureaus will consider it as one shopping attempt for the same kind of loan. Furthermore, compare rates only for loans that are intended to be taken by you, not the intended ones. That is when inquiries can have negative effects on credit scores, it’s when one applies for credit they do not require.

Monitor Your Credit Report

Thus, checking your credit report does not affect it at all, but credit monitoring is always a good idea. You can check all of your three credit reports once a year for free at www. annualcreditreport. com. Negotiate with the credit bureaus to eliminate such errors, thereby boosting your scores.

You can also apply for the free trials for services, which give your weekly or monthly credit score and credit report. Keeping an eye on your credit allows you to detect issues in their preliminary stages, including identity theft or situations that are negatively affecting your credit scores. By checking your latest score and inquiry history once a month, you can assess whether your shopping affected your credit positively or negatively.

The Takeaway – Do Not Avoid Regular Credit Checks

Pulling your credit from one or two lenders when applying for the normal consumer loan that you qualify for will not have adverse effects on your score in the long run. Even if there are several inquiries within a few months, the situation gets back to normal within a year. Thus, you should not hold back from applying for credit that you want or need due to concerns regarding regular credit checks.

Just don’t overdo it or restrict yourself to inquiries that relate to the kind of loans you want to borrow immediately. If the inquiries have to be made then it is wiser to comparison shop for the best loan rates within 45 days so that the inquiries are grouped and negative impacts reduced even further. It is also important to frequently check your credit reports and scores to maintain your excellent credit profile.

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