Working to build or rebuild your credit can be an exciting yet complicated process. So, it’s wise to think about not only the positive actions you should take, but also the mistakes you’ll want to avoid on your credit improvement journey.
Perhaps you’ve heard (or read) not to let others check your credit reports too often or you risk damaging your credit scores. There is some truth to that statement, but there’s also more to the story.
Allowing lenders or other businesses to pull your credit reports might ding your credit scores. But you can review your personal credit as often as you like without fear. Running your own personal credit check does not lower your credit scores.
When you or anyone else receives a copy of your credit report, the credit bureau that granted access to your information places an entry on your file called a credit inquiry. A credit inquiry lets you know that someone obtained your credit information.
In the credit scoring world, there are hard and soft credit inquiries. A hard credit pull takes place when someone like a lender reviews your credit information for a loan application review (among other reasons). Soft inquiries, by comparison, occur when you ask a credit bureau for a copy of your own credit report.
Credit scoring models, like FICO® and VantageScore, don't factor soft inquiries into your credit score. You could pull your personal credit reports a dozen times a day, if you wanted to, and it would not lower your credit score by a single point.
Furthermore, a soft credit inquiry only shows up on the credit reports you pull. Lenders never even see them.
When a lender checks your credit report, it’s called a hard inquiry. Credit scoring models consider hard inquiries and, as a result, these credit checks have the potential to lower your credit score.
You might not like the idea that letting lenders check your credit could lower your credit score. But there is a valid reason why a hard inquiry may impact your credit score in a negative way. Applying for a lot of credit in a short period of time indicates a higher level of credit risk.
When credit score developers review credit reports to create scoring models, they look for trends among consumers. There’s a clear connection between the number of times someone applies for new credit and how likely they are to pay bills severely late in the near future. Credit scores predict how likely you are to pay a bill 90 days late or later in the upcoming 24 months based on your past credit actions.
You don’t need to decide to stop applying for new credit altogether, however. It’s fine to seek new credit from time to time, especially if you’re trying to rebuild your credit rating. Even people with exceptional FICO Scores (750 and above) pursue new credit opportunities and may have some hard inquiries on their credit reports.
FICO states that most people will see a credit score decrease of less than five points from one new hard credit inquiry. Yet because of how credit scores work, you can’t predict exactly how many points your score will decrease after someone checks your credit report. In fact, there’s a chance that a new hard credit inquiry won’t impact your credit score at all.
The same outcome can apply to questions such as “does requesting a credit increase hurt your score?” or “does applying for a credit card hurt your credit rating?” It depends on each individual situation.
Hard inquiries are part of the “New Credit” section of your credit report (for scoring purposes). New credit is worth 10% of your FICO Score. Meanwhile, recent credit influences 11% of your VantageScore credit score. Compared with other credit score factors, inquiries only impact a small portion of your credit score.
FICO and VantageScore don’t consider each hard credit inquiry on an individual basis. Rather, scoring models look at your total number of credit inquiries and how they relate to the rest of your report.
You can earn a certain number of points (to be added to your overall credit score) based on the total number of hard inquiries that appear on your credit report. Here's an idea of how it works.
The previous example is 100% hypothetical. (Credit score creators don't share this much information about how a credit scoring model works for proprietary reasons.) But the example does illustrate how credit scoring works in terms of hard inquiries.
The reason the credit bureaus list inquiries on credit reports is because the Fair Credit Reporting Act (FCRA) requires them to do so. Why is this a credit reporting requirement? It’s because you have the right to know who accesses the personal information on your credit report and when they do so.
Per the FCRA, most inquiries must remain on your credit report for 24 months. Some can be removed sooner, at around the one-year mark.
However, FICO and VantageScore only factor inquiries into your credit score for 12 months. Once a hard inquiry is over a year old, it will no longer have any affect on your credit score.
Checking your personal credit reports from Equifax, TransUnion, and Experian won’t hurt your credit scores, but it’s important to understand why you should check them. The reason it’s critical to review your credit reports often is because credit reporting errors could cost you money and opportunities.
Credit scoring models consider the information on your credit report, exactly as it appears. So, if a scoring model sees negative information on your report, it will think you are a higher credit risk. As a result, you’ll probably earn a lower credit score.
Incorrect negative information on a credit report can lower your credit score just like accurate negative information. Since credit reporting mistakes do unfortunately happen, you need to make a habit of checking your own credit reports to make sure they’re accurate.
If you discover an error on your credit report, the FCRA allows you to challenge it. You can send disputes to any credit reporting agency online, over the phone, or by sending a letter. Disputes are sometimes called credit repair, and you’ll find many companies that will send disputes for you (for a fee). If you want to avoid paying someone to work on your behalf, however, you can manage the dispute process on your own.
You may also want to review your credit scores from time to time. Monitoring your credit scores can provide you with a quick overview of your credit risk level and will let you know if you have room to improve.
There are a number of safe ways to check your credit score. Below are a few options to consider.
In the United States, there are two primary credit score brands—FICO and VantageScore. Ninety percent use FICO Scores when you apply for new credit. And in the mortgage industry, lenders use FICO Scores exclusively. Meanwhile, if you check your own credit score online, you’re more likely to see some version of your VantageScore credit score.
Because more lenders use FICO Scores, some people believe that FICO Scores are more accurate. But in reality, they’re just different.
Both types of credit scores work in similar ways. If a negative item shows up on your credit report and your FICO Score drops as a result, your VantageScore credit score would most likely go down, too, but possibly by a different amount. So, tracking your free VantageScore credit scores online can be useful. If your VantageScore credit scores start to improve, there’s a good chance your FICO Scores are following suit.
Additionally, credit card issuers and lenders use billions of VantageScore credit scores each year. This fact alone is reason enough to monitor both credit score brands instead of focusing on only one. Both are accurate and important.
It’s a good idea to check all three of your credit reports several times per year. Once a month is ideal. Frequent credit checks are a great way to keep tabs on your credit health while monitoring for errors, fraud, and identity theft.
The FCRA grants you free access to your credit reports from Equifax, TransUnion, and Experian once every 12 months. You can claim your free reports at AnnualCreditReport.com. And during the COVID-19 pandemic, you can review your three reports (without scores) for free once a week.
Hard credit inquiries are less likely to lower your credit score compared with other types of negative information. Credit inquiries (and similar factors) only impact 10% of your FICO Score.
If you want to protect your credit score from damage, it’s a good idea to avoid these potential credit-damaging actions.
After 12 months, scoring models do not consider hard inquiries when they calculate your credit score. At that point, hard inquiries no longer affect you.
However, your credit score may start to improve from hard inquiries well before the 12-month mark. In credit scoring, recency matters. The more recently a risky activity took place (like hard credit inquiries), the bigger the impact will be. As time passes and the hard inquiries on your report become older, they should impact your credit score less and less.
On average, high credit scorers (those with a FICO Score of 750 and above) are seven to nine months away from their last hard credit inquiry. So, you don’t have to be afraid to apply for new credit. You just need to be selective about when and how often you allow lenders to access your credit file.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on Linkedin and Twitter.