It seems there are fewer secretive corners of your financial status than your credit. It’s meticulously hidden, questionably maintained, and scrupulously issued. The credit check is your only real insight to what is going on in the woodwork down below. Typically double checked by a lender or employer do these checks hurt your credit score? And if they do, why?
Credit scores are stored and calculated by a few different competing entities, which can cause some discrepancy. The main system for checking credit was developed by the Fair Isaac Co. and is deigned the FICO score. FICO is the primary source of credit score calculation amongst the United States amongst the credit bureaus, which are hosted by the three big names in the credit industry: Experian, TransUnion, and Equifax. The system works by issuing a credit rating that ranges between 300 and 850 that grades credit payment performance, with 723 being the average amongst credit holders. The divide between prime and subprime credit is traditionally set at the 620 mark, to give an indication of where healthy credit would lay on the system. Due to the split amongst the three credit bureaus, Americans are allowed to have issued a free credit report yearly from each of the bureaus. Contrary to logic, however, this report does not include your credit score, which must be accessed separately through different channels.
Credit inquiries are divided into two categories: Hard and Soft inquiries. The hard inquiries are designed to be checks based around when you make functional use of your credit. If you’re checking for the purposes of a loan, a mortgage, or a credit card the check that is involved is done to see if you’re a viable candidate for that type of contract. Hard credit loans do affect your credit score negatively due to an increase in the amount of functional checks, meaning an increase in the likelihood of other similar financial ventures, which would denote a heightened chance of credit defaulting on behalf of the credit holder. A soft inquiry, however, does not adjust your credit rating. The soft checks look for non-credit and loan utilities, such as a check by an employer or pre-screening by corporations for future credit offers.
Usually a single hard credit check will only move your credit score negatively by 5 or so points. But this is statistically adjusted for someone who has held a credit line in good standings for multiple years. For new accounts with more questionable standings a hard credit check can be a lot more significant, weighing more heavily on fresh accounts until they get some mileage on them. Also take into consideration that having several inquiries over a short period of time can add up to a significant hit on your credit rating, due to the notion that it denotes a high likelihood of financial distress. This can lead to a snowballing situation where a holder with an otherwise well maintained credit score is under slight duress which begins a cycle of denied loans and inevitable financial breakdown created by the exact same system to protect against it. This scenario is extremely rare but has been called into question as a very substantial negative to the system as it’s designed to be built to protect lenders over the interests of their clients.
Multiple credit checks of the same kind have a built in safety feature that will not impact your credit rating too drastically. If multiple checks of the same kind are made within a fixed period of time than all further checks beyond the first are discarded. The typical time frame window for this effect is usually between 14-45 days, but there are several other factors to take into consideration. Credit inquiries only stay on your credit report for two years, but typically the credit score formula only really adds the inquiries from the previous year. For the most part if you do not apply for any credit inquiries for over a year than the negative impact of the credit checks should fall off and give you a cleaner slate to work with.
These systems are in place to help protect loan issuers from users who often and systematically apply for loans. It helps decrease the chances of defaulting and of fraud, and mostly should not impact the typical credit holder. It also has the negative impact of potentially causing a lot of distress to someone who might already be in a financial crisis and just can’t get their foot in the door to receive a loan, however. The best thing to do when it comes to checks like this is to be frugal and conservative, and not to bandy about your credit score until you’ve shopped around.
Mike Thimmesch writes for Totally Money where you can find out how to get interest only mortgages and browse through different options for a cheap mortgage.