Why Does Looking at Your Credit Score Lower It?

A credit score serves as a numerical summary of an individual’s creditworthiness, typically ranging from 300 to 850. It indicates the likelihood of paying bills on time and is a significant factor lenders consider when evaluating applications for credit. A higher score generally leads to more favorable loan terms and interest rates, influencing access to financial products such as credit cards, mortgages, and auto loans. The common concern that checking one’s own credit score could negatively impact it often stems from a misunderstanding of how credit inquiries function.

Understanding Credit Inquiries

A credit inquiry refers to a request for an individual’s credit report or score information from a credit bureau. Lenders or service providers primarily make these inquiries to assess financial risk before extending credit or services. The information helps them determine an applicant’s reliability and historical financial behavior, allowing institutions to make informed decisions about approving credit, setting interest rates, or establishing credit limits.

Credit inquiries are a fundamental part of the credit ecosystem, providing a snapshot of an individual’s borrowing and repayment history. They are a means for various entities, including financial institutions, potential employers, and landlords, to gauge financial responsibility. The type of inquiry determines whether it will appear to other lenders or affect a credit score.

Types of Credit Inquiries

Credit inquiries are categorized into two main types: soft inquiries and hard inquiries, each with distinct implications for a credit score. Soft inquiries occur when a person or company reviews an individual’s credit report. Examples include checking your own credit score through a personal finance app or bank, receiving pre-approved credit offers in the mail, employment background checks, or obtaining insurance quotes.

Soft inquiries do not affect a credit score and are not visible to other lenders. Many credit card companies and banks offer free access to credit scores, which are always soft inquiries. These checks are considered low-risk because they are not tied to a new credit application.

In contrast, hard inquiries occur when an individual applies for new credit. This includes applications for a new credit card, mortgage, auto loan, personal loan, or opening certain utility accounts. Hard inquiries require the applicant’s explicit permission before the lender can access their credit report.

These inquiries appear on a credit report and can influence the credit score. Lenders view multiple hard inquiries within a short period as a potential indicator of increased financial risk.

Impact on Your Credit Score

Hard inquiries have a minor and temporary impact on a credit score. For most individuals, a single hard inquiry causes a small drop, often less than five points on a FICO Score. The effect lasts for up to 12 months, although the inquiry itself remains on the credit report for up to two years. The overall influence of hard inquiries on a credit score is relatively small, often accounting for about 10% of a FICO Score.

Credit scoring models, such as FICO and VantageScore, incorporate mechanisms to account for “rate shopping,” a practice where consumers apply for multiple loans to compare terms. For specific types of loans like mortgages, auto loans, and student loans, multiple inquiries made within a concentrated timeframe are treated as a single inquiry. This prevents penalizing consumers for seeking the best possible interest rates and loan conditions.

The rate shopping window varies by scoring model; FICO models group inquiries made within a 14- to 45-day period, while VantageScore uses a 14-day window. If applications for the same type of loan fall within this specified timeframe, they count as one inquiry. This design allows individuals to compare offers from various lenders without significantly impacting their credit score. Strategic timing of loan applications can help mitigate any negative effects.

Monitoring Your Credit

Individuals can monitor their credit scores and reports regularly without fear of negative repercussions. Many credit card issuers, banks, and personal finance applications offer free access to credit scores, which are generated using soft inquiries. These services provide a convenient way to stay informed about one’s financial standing and oversee credit health.

It is also important to regularly review credit reports for accuracy. Federal law grants consumers the right to a free copy of their credit report every 12 months from each of the three major nationwide credit reporting companies: Equifax, Experian, and TransUnion. These reports can be accessed at AnnualCreditReport.com. Checking a credit report is considered a soft inquiry and will not affect the credit score.