Understanding how credit scores work is essential for anyone looking to manage their finances effectively. One common concern is whether checking your credit score will hurt it. Let’s explore this topic to provide clarity and peace of mind.
Hard Inquiries vs. Soft Inquiries
What Are Credit Inquiries?
Credit inquiries occur when someone checks your credit report. There are two types of credit inquiries: hard inquiries and soft inquiries. Understanding the difference between these two is crucial because they affect your credit score differently.
Hard Inquiries
Hard inquiries, also known as hard pulls, occur when a financial institution checks your credit report as part of their decision-making process. This usually happens when you apply for a loan, credit card, mortgage, or other types of credit. Hard inquiries can impact your credit score because they indicate that you are seeking new credit, which may increase your credit risk.
Soft Inquiries
Soft inquiries, or soft pulls, occur when you or someone else checks your credit report for non-lending purposes. Examples include checking your own credit score, pre-approved credit offers, and background checks by potential employers. Soft inquiries do not affect your credit score because they are not linked to active credit-seeking behavior.
How Hard Inquiries Affect Your Credit Score
Short-Term Impact
When a hard inquiry is made, it typically results in a small, temporary decrease in your credit score. For most people, this decrease is around five points or less. The impact of a hard inquiry is usually short-lived, with the effects diminishing over time.
Multiple Inquiries
If you are shopping around for the best rates on a loan or mortgage, multiple hard inquiries made within a short period (usually 14 to 45 days, depending on the credit scoring model) are often treated as a single inquiry. This practice, known as rate shopping, minimizes the impact on your credit score while allowing you to find the best financial product for your needs.
Long-Term Impact
Hard inquiries remain on your credit report for two years, but their impact on your credit score lessens over time. After about a year, the effect of a hard inquiry on your credit score becomes negligible.
How Soft Inquiries Affect Your Credit Score
Soft inquiries have no impact on your credit score. This means you can check your credit report and score as often as you like without worrying about damaging your credit. Regularly monitoring your credit can help you stay informed about your financial health and catch any errors or fraudulent activity early.
How Often Should You Check Your Credit Score?
Regular Monitoring
It’s a good practice to check your credit score regularly. Many experts recommend doing so at least once a month. Regular monitoring allows you to track your progress, identify any changes, and take corrective action if necessary.
Annual Credit Report
In addition to checking your credit score, you should also review your full credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at least once a year. You can obtain a free credit report from each bureau once a year through AnnualCreditReport.com. Reviewing your full credit report helps ensure that all the information is accurate and up-to-date.
Tips for Maintaining a Healthy Credit Score
Pay Your Bills on Time
Your payment history is one of the most significant factors in determining your credit score. Always pay your bills on time to maintain a positive payment history. Setting up automatic payments or reminders can help you avoid late payments.
Keep Your Credit Utilization Low
Credit utilization refers to the amount of credit you are using compared to your total available credit. A lower credit utilization ratio is better for your credit score. Aim to keep your credit utilization below 30%. If possible, paying off your balances in full each month is ideal.
Avoid Opening Too Many New Accounts
Each new credit account you open can result in a hard inquiry, which can temporarily lower your credit score. Additionally, opening multiple new accounts in a short period can make you appear risky to lenders. Be selective about applying for new credit and only do so when necessary.
Diversify Your Credit Mix
Having a mix of different types of credit accounts, such as credit cards, installment loans, and mortgages, can positively impact your credit score. Lenders like to see that you can manage various types of credit responsibly.
Keep Old Accounts Open
The length of your credit history is another factor in your credit score. Keeping older accounts open, even if you don’t use them frequently, can help increase the average age of your credit accounts, which can positively impact your score.
Common Myths About Credit Scores
Checking Your Own Credit Score Hurts It
As we’ve established, checking your own credit score is considered a soft inquiry and does not affect your credit score. Regularly monitoring your credit is a good financial habit that can help you maintain a healthy credit profile.
Closing Credit Cards Improves Your Score
Closing a credit card can actually hurt your credit score, especially if it reduces your available credit or shortens the length of your credit history. Instead of closing unused credit cards, consider keeping them open and using them occasionally to keep them active.
Paying Off a Debt Removes It from Your Credit Report
Paying off a debt is a positive step, but it doesn’t remove the account from your credit report. The account will still be reported for up to seven years, but it will be marked as paid, which is better for your credit score than having unpaid debt.
Carrying a Balance on Your Credit Card Helps Your Score
Carrying a balance on your credit card and paying interest does not help your credit score. In fact, it can hurt your score if it leads to high credit utilization. Paying off your balance in full each month is the best practice for maintaining a healthy credit score.
CreditGrin’s 🙂 Final Thoughts
Understanding the impact of checking your credit score is crucial for maintaining your financial health. Remember, checking your own credit score is a soft inquiry and does not affect your score. Regular monitoring of your credit score and report can help you stay informed and proactive about your financial well-being. By following the tips outlined in this article, you can maintain a healthy credit score and be better prepared for your financial future.
If you have more questions about credit scores or need personalized advice, feel free to reach out through our blog’s contact page. We’re here to help you navigate the complexities of credit and achieve your financial goals.
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