Knowing how your credit score works is a key step in improving your financial situation. Unfortunately, the world of credit scores can seem complicated if you’re unfamiliar with it. How do credit scores work, for instance? How do you know if something will help or hurt your credit? Is it bad to check your credit score? These are all great questions to ask when familiarizing yourself with credit scores.
If you’re hoping to improve your money management skills, answering these questions is a great way to start. Read on to learn more about credit scores, how they work, and what to watch out for when attempting to improve yours.
Checking your credit score, or credit report, will not cause your score to drop. In fact, keeping track of your credit score and report is an important part of managing your finances. Check them often and keep an eye out for any inconsistencies so you can report them if found.
That being said, if you’re applying for new forms of credit and a lender/company runs a credit check—that may affect your score.
It all depends on the type of credit check they run. There are two types of credit checks that a lender, credit card company, bank, or other financial institution can run: a hard inquiry, and a soft inquiry.
A soft credit check is one that does not affect your credit score. Some lenders or credit card companies offer to only do soft credit checks as well. These checks will not be visible to other lenders who check your credit report.1
A hard credit check on the other hand will appear on your credit report. Lenders and banks may use a hard credit check if you’re applying for a new loan or line of credit. These inquiries will appear on your credit report, and could potentially lower your score if they happen often enough.2
One hard inquiry will probably not lower your score much, if at all. But having a lot of them on your credit report will tell lenders you may not be a trustworthy borrower.1
When applying for a new loan, line of credit, or credit card, make sure you find out from the lender whether or not they will be performing a hard credit check.
Every year you’re allowed to view your credit report for free. Checking your credit report is different from checking your score. But it’s important to keep track of both.
There are three major companies, or “credit bureaus,” that keep track of your borrowing history: Experian, TransUnion, and Equifax. You’re legally entitled to a free copy of your credit report from each of these companies once every year. To get your free credit report, go to www.annualcreditreport.com.1
Checking your credit report more than once a year could potentially cost you money. It’s wise to check your report at least once a year. Check for anything that seems off and report it to the credit bureaus.
It’s also a good idea to check often using one of the many resources that offer checks for free. You can sign up for accounts with each of the credit bureaus, or use other companies that keep track of your scores.
You should keep a close eye on your credit scores from each of the three credit bureaus. It’s wise to set up an account with each of these companies to keep track of your scores. There are also several companies that allow you to view your credit scores for free, like CreditKarma.
Each of the three credit bureaus will have a credit score for you. Sign up for their free accounts at Experian, TransUnion, and Equifax. Check your scores and check them often. For more information about credit scores, loans, and personal finance, check out the rest of the CreditNinja Dojo!