Do Credit Checks Hurt Your Credit Score?
Credit checks, also known as “credit inquiries,” occur when a business or lender requests a credit report on an individual or a company, primarily for the purpose of extending credit. And yes, in certain circumstances, credit checks can harm your credit score, affecting your ability to obtain credit or to establish a more favorable interest rate for credit received.
But there are different types of credit checks. Some checks hurt, some don’t. And for the most part, the downward impact of credit inquiries on your credit scores tends to be short term.
Credit inquiries are one of the five pieces to a credit score puzzle that make up a consumer’s credit score. A credit score can range from as low as 300 to as high as 850. The higher the score, the better the credit.
The credit score formula relies on an individual’s payment history, available credit, credit checks (or inquiries), length of time using credit and the type of credit used. Each factor has varying levels of impact on the total credit score. Credit inquiries can count for as much as 10% of a score’s total calculation, depending on the credit scoring model being used.
In general, the more credit inquiries you have on your credit report, the more your credit score will be harmed. This is especially true if the credit inquiries were for unsecured debts made over a relatively short time frame.
For instance, a consumer has applied and received an approval for two new credit cards each with a $5,000 credit line. A credit card company that evaluates a new credit card application from that same consumer would notice that there have been two brand new cards issued. Why is this important?
The answer lies in knowing why the consumer applied for three credit cards almost at the same time. Did the consumer lose their job and wanted to set up a credit card safety net before it was too late? Did the household lose some income and need some way to cover expenses? Or perhaps a bankruptcy is imminent and the consumer is attempting to open up new credit in order to buy everyday items? In all of these scenarios, the lender could be taking on a greater risk that the borrower will eventually default.
This is why multiple credit checks in a shorter time frame tend to hurt a person’s credit score. This is particularly true if the consumer currently has very little credit history.
However, there are some exceptions.
If a consumer is applying for credit for the same transaction in a relatively short period of time, multiple credit checks will not have as big of an effect on a credit report. An example of this is when a consumer is shopping for a new car, and three car dealers pull credit to evaluate their potential customer. Another common example is when a consumer is applying for a mortgage and made a loan application at two different banks for the same house.
Again, the second and subsequent inquiries will have a negligible effect on credit score, because it is normally assumed that the car buyer will end up with only one auto loan. Similarly, the homebuyer will typically end up with only one mortgage loan.
Compare this with inquiries for unsecured debt, where the borrower could theoretically end up with multiple credit cards or personal loans.
These inquiries are all the result of a direct request for credit by a consumer or lender. This direct request is sometimes called a “hard request” or a “hard pull.” A hard pull is in contrast with another type of credit check called a “soft pull”. A soft pull is when an inquiry does not affect credit at all.
The most common soft pull is when consumers pull their own credit report to review. Other soft pulls occur when an employer reviews a credit report for a potential hire or an insurance company uses credit scores to establish an insurance premium.
Soft pulls have very little or no effect on your score. Similarly one isolated credit inquiry will have minimal impact on your credit scores‘even if multiple lenders evaluate that same credit report.
Multiple hard pulls over a short period of time, on the other hand, will ultimately degrade a credit profile to the point that lenders may decline to issue credit altogether. For example, applying for 10 different credit cards in a three-month period may result in red flags with lenders and creditors, as well as lower credit scores.
One thing to note is that most credit scoring systems only consider the most recent credit inquiries and hard pulls. Credit checks older than four months typically have minimal or no effect on credit scores.
The reason for this is that if those older credit inquiries resulted in new installment loans, credit cards or other debts, they would be reflected on the current credit report. If credit inquiries don’t result in new debts, then their impact diminishes.
To summarize, it’s important to understand that multiple credit inquiries will affect your credit scores. But credit inquiries are also unavoidable.
If you’re shopping for a credit card or a loan to buy a home or car, your lender will need to check your credit. That credit pull will drop your credit score slightly, but it’s a necessary price. Plus, the effect on most consumers’ credit scores tends to be minimal and short term.