Understanding Credit Checks and How They Impact Your Credit Score

Many people are very unsure and fearful when it comes to their credit score. There’s a wealth of information available on the subject, but often, these sources are saturated with numbers, figures, and terms that you may have never encountered before, let alone understand how they apply to you. It can be very intimidating.

This feeling of anxiety is often compounded by the fact that your credit score is one of the most important numbers in your life. In addition to your social security number, and your date of birth, it’s a figure that you’ll want to be aware of, and know at any given time. But you may be wondering: how do I check my credit score, and will it have any kind of impact? You’re probably terrified of doing anything that’s going to drag down your financial standing.

I understand completely, and this post is designed to introduce you to your credit score, explain when checks are made against it, how they impact your score, and how you can safely check your own.

Defining Your Credit ScoreCredit Score

Before we move further, you need to understand what a credit score is, if you aren’t already aware. A credit score is a number, between 300 and 800, that serves as an indicator of how financially responsible you are. The closer you are to 300, the worse off your financial standing is, while scores closer to 800 indicate a very healthy credit life.

You credit score is a compilation of five factors, including your financial history, credit utilization, the length of your credit history, credit diversity, and newly opened credit. Compiled together, these factors are assessed together, and given a composite score, to rank you based on how responsible you’ve been with your credit.

Your credit score is extremely important, because it will ultimately decide what future credit options are available to you, and under what terms and conditions. For example, if you have a bad credit score, you may qualify to receive a loan, but you’ll probably be severely limited in how much you can borrow, and have to deal with a higher interest rate. This is because, since you’ve been assessed as poor at managing credit, there is more risk to the lender that you won’t make your repayments, or will be consistently late.

Making a Check Against Your Credit Score

At various times throughout your life, your credit score is going to be assessed, and sometimes, it will be done without your knowledge. This is terrifying for many people because they get the impression that someone is looking at them, and making an assessment, without ever having the chance to explain themselves if their scores aren’t where they want them to be. It’s understandable, but a lot of the time, that fear stems from information that isn’t complete, or in some cases, is flat out wrong.

To set the record straight, first of all, understand that there are two types of checks that can be made against your credit score: hard inquiries and soft inquiries. Both are made for different reasons, and only one of them will impact your credit score:

Hard Inquiries

Hard inquiries are typically made when an official credit transaction needs to occur. Examples include applying for a new credit card, getting final approval for a personal loan, or requesting an increase in your credit limit. Hard inquiries are made by the institutions you work with, and can indeed lower your credit score.

That’s the bad news. The good news is that, most of the time, you’ll know before a hard inquiry is made, and it won’t affect your credit score by a great amount. Typically, your credit score will only drop anywhere from 2 to 15 points, not the couple dozen or hundred points that you may have heard. This is fairly easy to recover from, provided your other credit factors are solid.

Soft Inquiries

Contrasting hard inquiries, soft inquiries are checks made against your credit score simply to get a rough reference about where you stand as a user of credit. Soft inquiries are often made to get pre-approved for a loan, by an employer for a background check, or whenever you check your own score. Unlike hard inquiries, a soft inquiry will not affect your credit score in any way.

Soft inquiries can be made without your permission or knowledge, because they’re considered as a reference point of data used to make a final decision, which is also why they don’t affect your credit score. Even though soft inquiries won’t affect your score, you should still verify if one is going to be made, because sometimes, what one agency uses a soft inquiry for, another will use a hard inquiry, as is sometimes the case when you apply to rent an apartment. Verify which of these will be the case.

Checking Your Score

As I mentioned above, it’s critical that you know your own credit score at any given time, especially if you’re preparing to take out a loan or to apply for a new credit card. It’s the only way you can know for sure if your credit score is strong enough to support what you’re trying to do.

Checking your credit score is very easy to do; each of the three credit bureaus will allow you to check you score once per year for free. You can continue to make as many checks as you want, and it will never affect your score, but you’ll have to pay a small premium for additional checks. However, certain credit cards are now allowed to check your score for free, as many times as you please, so be sure to ask about that if you’re in the market for a new credit card.

Correcting Your Score

Once you’ve completed your check, you’ll be given access to a full credit report, which will show your history across all of the credit institutions you currently have access to, as well as those you’ve had in the past. Be sure you read your report carefully; your credit score is compiled by human beings, and humans make mistakes. If you do find a discrepancy in your report, you need to take steps to correct it, which can be a bit of a chore.

In order to change a piece of data on your credit report, you’ll need to send your supporting documentation directly to each of the three credit bureaus. This is because the credit bureaus compile their scores independently, and by law, cannot communicate with each other, unless there is suspicion of fraud or other illegal activity. It’s a hassle, no doubt about it, but you can’t afford to have your credit score suffer because of a mistake on someone else’s part.