People often wonder why their credit score goes down after they or a lender checks the information on their report.
The equations that output these scores work like black boxes, and the rules and consequences around hard versus soft inquiries are complex. Therefore, it is easy to be confused.
Be clear on one key point. Running your credit score will never hurt your qualification! The bureaus log a soft inquiry that only you can see.
However, the picture muddies once you begin the process of applying for a new borrowing account. Then, some pulls will impact your score more than others.
When Checking Credit does not Hurt Scores
While it might seem that checking your credit score lowers it, coincidence is a more likely culprit. Ratings fluctuate every day as lenders send updated data to the bureaus, so you have a 50% chance of seeing a drop each time you look at a new version of your report.
Most importantly, each time that you check your file, the bureau logs a soft inquiry, which the scoring equations never see and cannot include in your rating for that day. Also, they ignore interest rate shopping activities.
Soft inquiries display only on the bureau report that consumers see and not on the version that banks and finance companies utilize – plus the equations ignore these entries. Therefore, your credit score cannot lose points with any credit checks that result in algorithm-invisible information.
Keep in mind that soft inquiries appear every time an outside entity initiates a file request and in select instances when the person starts the process.
- Initiated by third party companies
- Preapproved credit card offers
- Account reviews run by existing lenders
- Started by the individual
- A consumer requests his or her file for educational purposes
- Banks prequalifying prospective customers
- Other business transactions with a permissible purpose
- Auto and homeowners insurance
- Employment background screening
- Cellular phone service providers
- Utilities (gas, water, electric, cable television)
- Property management (apartment rentals)
Shopping inquires do not hurt your credit score even though multiple lenders might check your credit report. Savvy consumers often apply at many different banks and finance companies just before making a significant purchase to find the lowest interest rates or most favorable repayment term lengths.
The equations are smart enough to recognize that numerous inquiries from similar creditors in a short time (30 to 45 days) is likely to result in only one new account. Therefore, they count the first and ignore the remainder.
- Student loans for college
- Mortgages for a home purchase or refinance
- Auto loans and leases
When Checking Credit Does Lower Scores
Expect your credit score to drop after a lender checks your credit report in connection with an application that you request. When a consumer initiates an application for a new borrowing relationship, the bureau will log a hard inquiry, which acts as an early warning signal that a finance company could approve a new account in the future.
New account activity makes up 10% of your daily rating and tends to subtract points until you establish that you can handle the extra obligation responsibly.
The bureaus log a hard inquiry every time a lender checks your credit report to assess your qualifications for a new installment loan or revolving arrangement. They remain on your file for 24 months, but their negative impact on your rating dwindles quickly based on the subsequent underwriting decision.
- 1 to 5 Points: During the period the bank evaluates your application and before they communicate the new account (if approved) to the bureaus 30 to 45 days later
- 0 Points: After the issuing company announces the new borrowing relationship that the entry was sending early warning signals about
- 0 to 3 Points: If the finance company declines the application, it communicates nothing further to the bureaus, but the equations assume the declination after several months pass
Bear in mind that your credit score does decrease in most instances where a bank pulls a copy of your consumer report in response to an application for a new borrowing account. However, every rule has an exception. In this case, you must pay close attention to which bureau your lender uses.
Hard inquiries only display on the file of the agency that furnishes the information to the requesting entity. Therefore, you could lose points on one, two, or three scores, depending on the number of pulls the finance company makes when underwriting a new application.
- Conforming mortgages require a tri-bureau merged report
- Each bank determines the number of bureau files to utilize for all other application types
- Credit cards
- Home equity line of credit
- Auto loans and leases
- Personal loans
- Patient financing programs