How Credit Checks Affect Your Credit Score

The Two Types of Credit Checks: Hard and Soft

There are two types of credit inquiries that can be run on your credit history and these are called “soft” and “hard” inquiries.

Hard and soft credit pulls will show the following information:

Loans
Lines of credit
Your payment history
Accounts in collections
Tax liens
Other types of public records

Although both types of inquiries show the same information, these credit checks will affect your credit score differently.

What Are Hard Credit Inquiries?

A hard credit inquiry is when a lender checks your full credit history to determine whether or not you’re eligible for a loan or a financed purchase. A hard inquiry is run when you submit the following applications:

Financing for a car, house, RV, or boat
Personal loans
Credit card loans

What Are Soft Credit Inquiries?

A soft credit inquiry is when someone checks your credit for reasons not related to your pursuit of a loan, and this type of inquiry can occur without your permission. For example, when a credit card company wants to send you a promotional credit offer, they’ll run a soft pull on your credit first. When your lender checks your credit periodically throughout the term of your loan, this will be a soft pull.

Other forms of soft inquiries include:

Checking your own credit through companies that monitor your credit or offer free annual credit reports.
An employer running a background check.
Pre-qualification checks for credit offers and loans

A Soft Credit Check Won’t Impact Your Credit Score

Soft credit checks won’t affect your credit score, so you don’t need to worry about losing points for these pulls. However, you’re only allowed one free credit check annually, so even though checking your own credit is only considered a soft pull, run your annual check intentionally. If you need to check your credit report more than once a year, you’ll need to sign up for credit monitoring services or pay for your report.

A Hard Credit Check Will Impact Your Credit Score

According to FICO, when a lender runs a hard inquiry on your credit, it will lower your credit score up to five points. If you have good credit, you can expect the drop to be on the lower end. However, this drop is only temporary and you’ll see your score rise again in a few months, provided your credit history remains positive. The small drop in your score could impact you if you already have bad credit, so it’s important to be intentional when applying for loans or credit cards.

Will Requesting an Increased Credit Limit Lower My Score?

Generally speaking, most requests for a credit limit increase will be a soft pull and won’t lower your score. However, it’s up to the individual creditor. Some lenders will use a hard pull to qualify you for a credit limit increase.

Multiple Credit Checks Will Be Counted Together

You might be wondering what happens when you submit an application that gets sent to multiple lenders at once, like when you apply for a mortgage or car loan. The good news is that while each lender will show up as a separate credit check on your credit report, most of the time these inquiries get counted as one when they’re the same type of inquiry made within a time period of around 14-30 days.

So, don’t worry about applying for loans where your application is distributed to multiple lenders to increase your options. If you have good credit, you don’t need to worry. Any credit checks will affect your credit score because lenders will count them together and your score will only drop as if one inquiry were run.

Keep in mind that if you apply for multiple types of loans, each one will impact your credit score individually. A cluster of car loan inquiries won’t be combined with a cluster of mortgage inquiries.

For example, if you apply for a mortgage and a car loan at the same time, the cluster of mortgage inquiries will be counted as one inquiry, while the cluster of car loan inquiries will be counted as an additional, separate inquiry. In the end, two credit checks will affect your credit score.

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Why Do Credit Checks Lower Your Score?

Temporarily lowering credit scores accomplishes two goals. First, it helps lenders identify consumers who apply for excessive loans. And although it’s not the reason for lowering scores, getting a lower score for each inquiry naturally discourages people from applying for too many loans.

It’s assumed that if a person needs to apply for credit too often, they’re probably not financially stable. Since a credit score determines whether or not you’ll be approved for a loan, people who are financially stable, responsible, and care about their credit won’t apply for lines of credit frivolously.

Why Do Credit Checks Show Up on Your Account?

Soft credit pulls don’t show up on your account for anyone but you. The reason hard credit inquiries stay on your credit report for others is to make sure lenders know how often you’re applying for credit accounts. Lenders look at numerous, frequent credit inquiries as a red flag.

For example, someone who applies for personal loans frequently might be living on credit, which indicates unstable finances. Combined with accounts in collections, too many credit applications can indicate someone without a stable income who can’t pay their bills on time.

How Long Do Credit Inquiries Affect Your Credit Score?

Hard inquiries usually stay on your credit report for two years. After that, they’ll be gone. If you’re thinking about applying for additional credit, it’s generally advised to wait at least 6 months since your last application before applying for a new line of credit.