It’s a common belief that regularly monitoring your credit score is a responsible financial practice, yet concerns linger about whether this act could harm your creditworthiness. The system is designed to encourage individuals to stay informed about their financial standing, and as a result, self-initiated credit inquiries are considered soft pulls. These soft pulls don’t affect your credit score. However, the situation changes when someone else, such as a lender or a credit card issuer, accesses your credit report, potentially leading to a different outcome.
This blog will cover the dynamics of credit checks, exploring when and how they can impact your credit score.
Does Checking Your Credit Score Hurt Your Rating?
Creditors often use your credit score as a risk assessment tool for determining your eligibility for credit opportunities and the associated interest rates. Credit scores range from 300 to 850, reflecting various aspects of your financial history, including payment records, bankruptcy filings, and credit utilization.
While checking your credit score is generally innocuous when self-initiated, the situation shifts when it comes to “hard credit inquiries” initiated by lenders. Hard credit inquiries involve a more comprehensive examination of your credit report and are performed by lenders when you apply for credit. Both widely used scoring models, FICO and VantageScore, consider hard inquiries when calculating your credit score.
The impact, however, is relatively modest, typically resulting in a decrease of five points or less. Despite this minor setback, the effects are temporary, with hard inquiries typically remaining on your credit report for up to two years. In contrast, soft credit inquiries, often used for prequalification purposes, offer a more credit score-friendly alternative, leaving your score unscathed.
Soft vs. Hard Credit Inquiries: How They Affect Your Credit Score
Knowing the difference between hard and soft inquiries is essential for maintaining a stellar credit score. The Fair Credit Reporting Act (FCRA) doesn’t differentiate between these inquiries, but Equifax, Experian, and TransUnion, the three major credit bureaus, have distinct policies regarding their inclusion on credit reports.
While hard inquiries can impact credit scores, the good news is that they eventually drop off the credit report. If you’re shopping around for the best rates, multiple hard inquiries within a specific timeframe are often treated as a single inquiry. This exception proves beneficial when making significant purchases, such as a home or securing a mortgage.
Here are the critical situations where hard inquiries may impact your credit score:
- A hard inquiry occurs when a creditor reviews your credit report while processing your loan application.
- Seeking an increase in the credit limit on an existing account may lead to a hard inquiry.
- Paying for a vehicle rental using a debit card may trigger a hard inquiry.
- Applying for a business credit card may lead to an inquiry appearing on your personal credit reports.
How to remove credit inquiries that may be impacting your credit scores?
It becomes crucial to dispute hard inquiries, especially when confronted with inaccuracies or outdated entries. You can initiate a dispute with each credit bureau online, by mail, or by phone. A dispute may help remove the hard inquiry if a creditor checked your credit without proper authorization or someone applied for credit in your name without consent.
Soft inquiries occur when credit checks aren’t tied to credit-making decisions. Explore the instances where soft inquiries allow you to check your credit, secure employment, and receive rate quotes without affecting your credit score:
- When you personally check your credit score.
- Some employers may conduct soft credit checks as part of the hiring process.
- Companies or government agencies might perform soft credit checks before granting professional licenses.
- Insurers may check your credit as part of the underwriting process.
- When a lender offers you a rate quote or prequalification, it typically involves a soft inquiry that doesn’t affect your credit score.
While self-initiated checks through soft inquiries are harmless and even encouraged for proactive credit monitoring, the impact of hard inquiries initiated by external parties underscores the importance of careful financial decision-making. You can build and sustain a credit profile that aligns with your financial goals by being vigilant about your credit health, proactively addressing discrepancies, and leveraging dispute mechanisms when necessary.