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Alternate name: Credit inquiry
How a Credit Check Works
The three credit bureaus maintain reports on millions of borrowers, They receive regular updates on the status of your accounts from companies that have already loaned money to you. These updates are usually made once a month. The reports are used by the Fair Isaac Corp. (FICO) and by VantageScore to calculate your credit score, another critical indicator of your creditworthiness. They’ll receive a copy of your credit report from the credit bureau when a lender, landlord, or other institution makes a credit inquiry. They’ll review it to evaluate not only your credit score but also whether you make payments on time and how well you can handle borrowing more money. That will determine whether you qualify for a loan and how much money you can borrow.
How Hard Inquiries Affect Your Credit Score
A credit check triggered by an application for a loan or credit is called a “hard inquiry.” You may have heard that hard inquiries can ding your credit score, and that’s true to an extent. You may be seen as a higher risk if you apply for multiple new credit lines in a short period of time. Your score may take a slight hit temporarily. How your score is affected by a hard inquiry depends on the type of loan that’s generating the inquiry. FICO and VantageScore treat all inquiries for the same type of loan as a single inquiry if it’s the kind that typically involves rate shopping, such as a student loan, an auto loan, or a mortgage. They’ll assume you were just looking for the best rate. But the hard inquiries will be considered separately if you apply for multiple credit cards in a short period of time. You’re not looking for the single best lender. Hard inquiries have a much smaller impact on your credit score than other factors, such as the timeliness of your loan payments and your total debt burden. FICO considers hard inquiries from only the prior 12 months when determining your score. It says that each hard inquiry should take less than five points off your score.
How Soft Inquiries Affect Your Credit Score
Soft inquiries occur when you check your own credit report or when you give a prospective employer permission to do so. These don’t affect your credit score, because you’re not actively seeking new credit. A soft inquiry can also occur when a lender wants to give you a pre-approved credit card offer. The credit card company may make a soft inquiry without your knowledge or permission. You can opt out of these unsolicited credit card offers by calling 888-5-OPTOUT (888-567-8688) if you don’t want to receive them.
Soft Credit Checks vs. Hard Credit Checks
You can request the reports through the individual bureaus’ websites or at annualcreditreport.com, a site that’s sponsored by the bureaus as a way of fulfilling their requirement to offer the free annual reports as mandated by the Fair Credit Reporting Act. Contact both the bureau and the lender in question if you see a mistake in one of your reports. Request a correction. Keep in mind that a hard inquiry by an unfamiliar lender may be a sign of fraud. Notify the bureau that you have reason to believe you’ve been, or are about to become, the victim of identity theft. Each of your credit reports will be slightly different, so it’s important to check all of them eventually. Lenders update account information at different times, and not all lenders report every activity to all three bureaus. The bureaus are actually competing, for-profit companies so they don’t routinely share information with each other. One exception is fraud alerts. They’re required to inform each other of these issues.
