Why Do (Some) Credit Checks Lower Your Score?
There are two different types of credit inquiries: One type will affect your credit score, while the other won’t affect it at all. Why is that?
If you are tired of relying on bad credit loans and no credit check loans to make ends meet during an emergency, then you’ve probably looked into ways that you can improve your credit score. And in the course of that research, you’ve certainly come across a note that “recent credit inquiries” make up 10 percent of your overall score.
While that might not mean much to you right now, the explanation is fairly simple: If a hard inquiry is run on your credit report, it will affect your score and likely cause it to dip. So why is that? Why would a credit check cause your score to go down? Shouldn’t actively monitoring your credit be a sign that you’re financially responsible.
Well, it’s actually a bit more complicated than that. And besides, people checking their own credit doesn’t actually affect their scores. When it comes to hard credit inquiries and how they impact your credit score, here’s what you need to know.
Here’s how credit scores (and credit reports) work.
In order to explain credit checks, we first need to explain credit reports and credit scores. If this is a subject you’re familiar with, feel free to skip to the next section, as this will all be stuff you already know.
Credit scores are based on the information contained in your credit reports, which are documents that track and compile your history as a credit user. Credit reports are created and maintained by the three major credit bureaus—Experian, TransUnion, and Equifax—and they cover the past seven to 10 years of your credit history.
Credit reports contain information on how much you’ve borrowed and on what accounts, whether you pay your bills on time, how long all your different accounts (loans, credit cards, etc.) have been open, whether you’ve ever been sent to collections or filed for bankruptcy, and more. The only kinds of loans that won’t show up on your score are no credit check cash advances like payday loans and title loans.
The most common credit score is the FICO score, which is scored on a scale from 300 to 850. The higher your score, the better your credit. It takes all the info on your reports and expresses it as a single three-digit number that summarizes your trustworthiness as a borrower. Another credit score is the VantageScore, which was created by the credit bureaus themselves.
While the specific FICO formula is kept top-secret, we do know the basic contours. There are five main factors that go into making up your score: Most important is your payment history, which makes up 35 percent of your credit score, followed closely by the amount of debt you owe at 30 percent.
The final third of your credit score is divided up between the length of your credit history (15 percent), your credit mix (10 percent), and your recent credit inquiries (10 percent). So while credit inquiries only make up 10 percent of your overall score, they’re still important enough that a single inquiry could cause your score to drop. Why is that?
There are two types of credit inquiries.
A credit inquiry (also known as a credit check or credit pull) occurs when information from your credit history, including your credit score, is requested. But not all credit inquiries are the same. In fact, there are two types of credit inquiries: hard and soft.
A hard credit inquiry almost always represents a request for new credit, as they occur when a potential lender or landlord is processing a loan or lease application. However, they can also sometimes occur when a person is being hired or considered for a promotion. Hard inquiries return a full copy of a person’s credit report.
In order to run a hard pull on your credit, a business or individual must get your permission first. If you are applying for a personal loan and the lender asks you for permission to run a credit check, then you know it’s a hard inquiry. These require your permission because they are recorded on your credit report and factor into the “recent credit inquiries” category.
Soft credit inquiries, on the other hand, return more of an overview of your credit history and do not require your permission. Importantly, soft credit inquiries also do not affect your score. When you receive a “pre-approved” credit card offer in the mail, that means a soft pull has been run on your credit. The same goes for when you check your own credit score.
That bears repeating: Checking your own credit score will not affect your credit!
Hard inquiries mean requests for new credit.
As we mentioned up above, hard credit inquiries are mostly run in situations where a person is asking for more credit, like applying for a new credit card or an online loan or a mortgage to buy a house. And when a person is asking to borrow more money, lenders need to ask themselves why.
Lenders care about one thing above all else: Getting paid back. The purpose of credit scores and credit checks is to determine whether or not a potential customer is likely or unlikely to pay back the money they are borrowing—plus interest.
When a request is made for additional credit, this can be taken as a sign that a person isn’t able to meet their current bills and debt obligations, or that they are looking to spend beyond their means. This is why even a single hard inquiry can ding your score, usually around five points. However, the effect only lasts a year or two.
Multiple credit inquiries within a short period of time, on the other hand, can lower your score even more, because it starts to look like you are desperate for more credit. And when someone is desperate to borrow money, that’s usually a sign that something has gone awry with them financially, meaning that they’ll be less likely to pay back the money they’re trying to borrow.
There is one exception: Lenders want to encourage borrowers to shop around for the best deal, especially for larger loans. But shopping around means filling out multiple applications which means multiple credit checks which means your score dropping.
In order to prevent this from happening, all credit checks for mortgage, auto, and student loans made within the same 45-day span are bundled together into a single inquiry. However, if you are shopping around for a credit card or an unsecured installment loan, you are unfortunately out of luck!
To read more about credit scores, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Will Closing a Credit Card Affect Your Credit Score?
- Have Bad Credit? Here Are Two Things You Should Do
- How to Build Credit When You Have No Credit at All