Did you know that a company can pull your credit information with just your name, address, date of birth, and consent? Although it may seem like they would need your Social Security number, they don’t.
Credit checks are an uncomfortable fact of adulthood. Everything from buying a home or car, renting an apartment, taking out a personal loan, applying to certain jobs, and even having utilities turned on, can involve a credit check.
Yet one of the confusing aspects of having good credit is that even as credit checks are becoming more common, having too many done can possibly lower your credit score.
Although it may not seem like a big deal if your credit score goes down a little bit, it could possibly cost you money. When you apply for a credit card or loan, the interest rates and annual percentage rates you are offered are typically dependent in no small part on your credit score.
Not all credit checks are equal in terms of their impact on your credit score, however. There are two types of credit checks: a “soft” inquiry and a “hard” inquiry.
A lower score can sometimes cost you on a monthly basis, as in the case of your credit card companies, which may conduct a “soft” credit inquiry on your score every month. One good thing of note is that “hard” credit inquiries have only a small impact on credit scores (typically just up to five points) and are primarily utilized by lenders to evaluate risk. Excessive credit inquiries, however, can indicate to a lender that a potential borrower is having cash flow issues and may impact credit score more dramatically. Below is a more in-depth look at each type of inquiry.
(Before we dive in, however, it’s important to note here that we’re not tax or credit repair experts. For any tax-related or credit-related questions or advice, you’ll want to consult a credit repair organization and/or your trusted financial advisor—and not a blog post like this one.)
What Is a Soft Credit Inquiry?
Soft inquiries often take place during an employment background check, when you check your own credit, or sometimes when rate shopping. Soft inquiries don’t negatively affect credit scores, no matter how often they take place, and they can even occur without the individual knowing about them.
Potential employers might view a credit report to get an indication of whether you manage your finances responsibly. However, they can’t see information like marital status, or even your actual credit score. Insurance companies see a similar report, which doesn’t give them your credit score.
Soft inquiries are often used by companies that send out pre-approved financial offers by mail, for example. Soft credit inquiries may show up on your credit report but, as noted, they don’t affect your credit score.
You can review your own credit report without worrying that it will affect your credit score. In fact, Federal Law guarantees the right to access credit reports from each of the three major credit bureaus annually for free; however, this free annual credit report does not show credit scores, only credit history. However, many credit card companies, online financial companies, and banks have started to offer consumers access to at least one credit score for free.
You can usually see soft credit inquiries on your own credit report. You might see language like “inquiries that do not affect your credit rating” with the name of the requester and the date of the inquiry.
Here are some of the benefits that can be gained from soft credit inquiries:
• You can get pre-qualified for various types of loans.
• You can receive pre-screened credit card offers.
• Checking your credit score regularly may help you keep track of it.
• Landlords can use soft inquiries to help determine which applicants meet the criteria to rent their apartment.
It’s recommended to regularly (at least once a year) review your own credit to make sure you’re on track and that there aren’t errors in the credit report that need correcting.
Errors can be disputed by writing directly to the credit reporting agency whose report shows inaccurate information. Additional information about how to dispute errors can be found on the Federal Trade Commission’s website .
What Is a Hard Credit Inquiry?
A hard credit inquiry typically takes place when applying for credit such as a credit card, mortgage, or car loan.
Credit issuers “pull” your credit information from one or all three of the major credit bureaus when doing a hard credit inquiry.
The three major credit reporting bureaus are Equifax®, Experian, and TransUnion. There are also dozens of smaller credit reporting agencies that may track your financial behavior.
• Credit bureaus track much of your financial activity, including:
• Credit card balances
• Loan balances
• History of credit payments for revolving, installment, and other loans
• Number and type of credit accounts
• Bankruptcy and other public record filings if they meet the minimum standards for reporting
Although it may seem like an invasion of privacy that these bureaus are constantly tracking your activity (especially considering data breaches ,) so far a better system hasn’t been invented or implemented to ensure that an accurate financial profile can be shared to inquiring parties. And there are laws, like the Fair Credit Reporting Act , that regulates how consumer credit information and credit reports are shared and with whom.
Some of the entities that credit bureaus can legally send your credit information to may include:
• Volunteer groups
• Government agencies
• Banks and credit unions
• Payment processors
• Debt buyers and collectors
• Retail stores
• Utility providers
• Insurance companies
• Gaming casinos that extend credit
All hard inquiries will show up in your credit report and can factor into credit score calculations depending upon the type of inquiry and the time frame of the inquiries. Each hard inquiry outside the scope of “rate shopping” has the potential to lower your credit score up to five points.
Multiple inquiries can affect credit scores because they can indicate to lenders that a consumer is repeatedly trying to apply for new credit, potentially indicating that they might be having financial issues and are relying heavily on credit and loan accounts. Inquiries for rate shopping vs new/additional credit shopping are distinguished in part by the length of time in which the credit inquiries occurred.
For newer scoring models, this time frame is 30 days—for older scoring models, this time frame may be 14 days. Lenders may use different credit scoring models.
So, if those rate shopping (for a mortgage, for instance) apply for multiple loans within a short amount of time, those checks should only be counted as one hard inquiry.
It’s good to note that hard inquiries stay on a consumer’s credit report for two years and stop affecting the credit score after a year.
How Is Your Credit Score Calculated?
There are two common scoring models used to convert credit report information into a credit score. These are FICO® Score and VantageScore. However, different versions of these models are used by various lenders. And different models may produce different scoring results.
The primary FICO scoring algorithm is most commonly used by the credit bureaus, although there are different credit scoring versions used by lenders (and even FICO has multiple scoring models available). Each credit bureau may come up with a different credit score for an individual, because they each may collect slightly different consumer information that they then “feed”into the credit scoring algorithm.
FICO has five factors it considers when calculating its credit scores:
• Payment history: 35% of this score is related to your history of payments on credit cards, student loans, mortgages, and other loans. The algorithm looks at the frequency and severity of missed and late payments.
• Credit utilization: 30% of this score is based on how much of your available credit you are currently using. If you’re one of those people who always has their credit cards maxed out, it likely won’t look good on your credit score.
• Length of credit history: The amount of time you’ve had each credit account open makes up 15% of this credit score. That’s why it’s nearly impossible to have perfect credit when you’re new to credit.
• New credit: 10% of this credit score has to do with opening new credit. However, opening a bunch of new credit accounts at the same time isn’t typically a good way to bump up your score, because that can look like you’re in financial trouble.
• Credit mix: The final 10% of this credit score is based on the different types of credit you have and how you’ve managed them.
VantageScore was created as a joint effort between Equifax, Experian, and TransUnion and has its own parameters you can read about here .
Credit scores can be negatively affected by late payments on anything from your gym membership to your cable bill. However, civil judgments and tax liens no longer affect credit scores because all three credit bureaus implemented a change in 2017 to remove tax liens from credit reports. One reason for the change: Too many cases of mistaken identity .
Avoiding Hard Credit Inquiries
While having a few credit and loan accounts is expected and can even boost a credit score, consumers should carefully consider if they need new credit before applying for an additional loan or account. It might not be a great idea, for example, to apply for a department store credit card just for a discount on a purchase. Also, applying for a credit card you know you won’t qualify for isn’t a great idea: The hard inquiry can hurt your credit score, and you wouldn’t have gained anything.
For those looking into multiple options for a mortgage or car loan, for example, it might be wise to do it within a short period of time, typically between 14 and 45 days, so that they have a greater chance of counting as one hard credit pull.
Another way to help reduce the number of hard inquiries is to ask which type of credit check a company will run before agreeing to the inquiry. You may want to ask if there’s a way to avoid a hard credit pull. An example would be a cable company that requires a hard credit inquiry prior to opening a new account.
To recap, here are a few tips to help mitigate credit inquiries:
• Check your own credit frequently (and take advantage of your annual free credit report)
• Apply for loans sporadically and thoughtfully
• Focus on behaviors that may help improve your score
Soft credit checks are becoming more commonplace, and it may be difficult to reach your financial goals without the help of loans and credit. Being proactive about achieving a good credit score and reducing the number of hard inquiries reflected on your credit report can be done. A strong score not only makes it easier to qualify for credit or a loan, it can also help consumers qualify for better lending terms.
Starting the Loan Process Without Hurting Your Score
If you’re in the market for a home or are interested in taking out a personal loan, you can find out what interest rates you qualify for without hurting your credit score1. SoFi offers home loans and personal loans at competitive rates.
With loans from SoFi, you’ll have access to customer service seven days a week. The application process can be done entirely online, and SoFi offers a variety of loan terms.
Find out what your rate options are in two minutes or less, today and keep your credit score intact.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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