Personal Finance Management 101: Do Credit Checks Hurt My Credit
Types of Credit Checks
Not all credit checks are treated the same when it comes to your credit score. Only credit checks in response to you applying for new credit actually hurt your score. For example, if you apply for a credit card and the credit card issuer checks your score, that will ding your credit. However, when a credit card company checks your score on its own, such as to pre-qualify you for an offer or make sure you’re the same creditworthy borrower you were when they first issued the card, that won’t hurt your score. “Generally, inquiries for ‘good credit’ -- which are things like a mortgage or student loans that lead to wealth -- carry less of an impact than inquires for credit lines considered ‘bad credit,’ such as a credit card,” says Danny Payne, a certified financial planner practicing in Southern California. Don’t let concerns about hurting your credit score stop you from checking your own credit score, however, because that won’t affect your score.
Treatment of Multiple Credit Checks
Unrelated inquiries are counted separately for credit scoring proposes. However, if you’re applying for a car loan, student loan or mortgage, it's normal to shop around for the best deals. The credit scoring algorithm takes this into account, and typically, all related inquiries that occur within a certain period of time are treated as just one inquiry. Depending on which version of the FICO scoring model is used, this period ranges from between 14 and 45 days. For example, say you’re going to buy a house. If you apply for five mortgages in a one-week period, all five inquiries count as just one for credit scoring purposes, which helps your credit score. However, if you applied for five credit cards in a one-week period, each inquiry would be counted separately.
Credit Score Effects
“The impact of a credit inquiry varies from person to person, based on their credit profile,” notes Payne. “Generally an inquiry results in less than a five point drop in FICO score. In certain situations like rate shopping for a mortgage, the rate impact is minimal, if any. However, multiple credit card inquiries in a short period of time could signal to creditors an applicant is in financial trouble and could result in a larger drop in FICO score.” The Fair Isaac Corporation also notes that the impact is greater if you have a shorter credit history. For example, if you’ve only had credit for two years, inquiries will have a bigger impact than if you’ve been using credit for a decade or two.
Unlike other negative information on your credit report, credit inquiries only remain on your credit report for two years. But, according to the Fair Isaac Corporation, which manages the FICO credit scoring algorithm, it only affects your credit score for the first year that the inquiry is on your credit report. So, if you’ve been on a credit application binge recently, the damage won’t last too long.