Introduction
Checking your credit score is an essential step in managing your financial health. However, many people wonder why their credit score seems to lower when they check it. This article will delve into the reasons behind this phenomenon and provide a comprehensive understanding of why checking your credit score can have a temporary negative impact.
Understanding Credit Scores
Before we explore why checking your credit score can lower it, let’s briefly understand what a credit score is. A credit score is a numerical representation of your creditworthiness, indicating the likelihood of you repaying borrowed money. Credit scores are calculated based on various factors, including payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries.
Soft Inquiries vs. Hard Inquiries
When you check your credit score, it is important to distinguish between soft inquiries and hard inquiries. Soft inquiries occur when you check your own credit score or when a potential lender or employer performs a background check. Soft inquiries have no impact on your credit score and are not visible to other creditors.
On the other hand, hard inquiries occur when you apply for new credit, such as a loan or credit card. These inquiries are visible to other creditors and can have a temporary negative impact on your credit score. It is important to note that checking your own credit score falls under the category of soft inquiries and should not affect your credit score.
The Impact of Hard Inquiries
When you apply for new credit, the lender will request your credit report from one or more credit bureaus. This request is recorded as a hard inquiry on your credit report. Multiple hard inquiries within a short period can indicate that you are actively seeking credit, which may be seen as a potential risk by lenders.
Each hard inquiry can lower your credit score by a few points, but the impact is usually minimal and temporary. The credit scoring models take into account that individuals may shop around for the best loan or credit card terms, so multiple inquiries related to the same type of credit within a specific timeframe are typically treated as a single inquiry.
Rate Shopping and Credit Score Impact
To mitigate the impact of multiple inquiries, credit scoring models often consider rate shopping. Rate shopping allows individuals to apply for multiple loans or credit cards within a short period, typically ranging from 14 to 45 days, without significantly affecting their credit score. This allows consumers to compare offers and find the best terms without being penalized for multiple inquiries.
It is important to note that rate shopping applies to specific types of credit, such as auto loans or mortgages, where multiple inquiries are expected. However, rate shopping does not apply to credit cards, as multiple credit card applications within a short period can still negatively impact your credit score.
Conclusion
Checking your credit score should not lower it, as long as you are performing a soft inquiry by accessing your own credit report. However, applying for new credit and generating hard inquiries can temporarily lower your credit score. The impact of these inquiries is usually minimal and diminishes over time, especially if you have a strong credit history.
Understanding the distinction between soft inquiries and hard inquiries, as well as the concept of rate shopping, can help you make informed decisions about checking your credit score and applying for new credit.
References
– Experian: www.experian.com
– Equifax: www.equifax.com
– TransUnion: www.transunion.com
