Your credit score is an essential part of finances. It is based on several factors that are also a part of your credit history—a detailed history of all your credit accounts (listed on your credit reports). There are many different reasons why your credit score can fluctuate. When you apply for new loans or lines of credit, lenders will pull your credit reports, which will bring down your credit score by a few points. Why does this happen? Keep reading below for more information on why your credit score can go down when checked.
Why Do Hard Credit Inquiries Hurt Your Credit Score?
When applying for loans, lines of credit, some jobs, or rental agreements, lenders will check your credit score. This is known as a hard credit inquiry. A hard credit inquiry shows that you are applying for credit or something in that realm (a rental, for example). And doing so often may be a sign of financial irresponsibility. Because of this application for credit, your credit score will decrease a little bit after each hard credit inquiry.
How Many Points Can a Credit Score Go Down With a Hard Inquiry?
Each hard credit check can bring your score down up to 10 points! However, there will usually be a three to five-point credit score drop in most cases. What does this mean for you? Each credit check you authorize will bring down all three of your credit scores. And so, you should really think about what you are applying for, check out pre-approval (which can be done without a hard credit check), and limit credit checks in a short amount of time.
Why Should I Check My Own Credit Score?
When you check your credit scores, that is called a soft credit inquiry which does not impact your credit scores. Checking your credit score is important for a few reasons:
It Can Help You Pick Up on Errors or Inconsistencies
Creditors can make mistakes when reporting to the credit bureaus. If those mistakes are on your credit report, they can negatively impact your scores. If you never check your credit reports, you may not even know that these mistakes are listed! It is important to pull all three credit reports and check for inconsistencies. If there is anything to fix, you can correct them with the corresponding credit bureau.
Knowing What’s on Your Credit Report Can Help You Understand Your Finances
By looking at your credit report, you can figure out how to improve your financial situation. Your credit report will have everything from your payment history to how much debt you have with newer and past credit accounts. With a clear picture of your credit history, you can figure out the best steps.
For example, let’s say your credit report shows a credit utilization ratio that is higher than the recommended 30%. And after taking a look at it, you may want to take action to pay off debt. There are all kinds of strategies and techniques out there to help you with that. Maybe you pursue a debt consolidation loan or start the avalanche method. Either way, you are coming up with a plan for your finances because of checking your credit report.
You Can See What Lenders Will See When They Check Your Credit Report
When lenders check your credit report, it is usually a massive factor for eligibility. Reviewing your credit report lets you see exactly what lenders and other third parties are seeing; this can help you be better prepared when inquiring about loan options. It can also help you figure out ways to improve your credit history.
How To Check Your Score
Consumers will have three credit scores from each major credit bureau—Equifax, TransUnion, and Experian, which you will get with your credit report. You should check each credit score to get the best picture. Everyone is entitled to a free annual credit report from each bureau. To request all three of your free annual credit reports, you can go to AnnualCreditReport.com or call toll-free at 1-877-322-8228.
How Often Should I Check My Score?
You should check your credit reports and credit scores at least once a year, but experts recommend checking them more often, every few months.
Understanding the Different Credit Score Models
There are a few different credit scoring models like TransRisk, CE Credit Score, and Experian’s National Equivalency Score. But the most popular ones you will see and third parties will use are VantageScore and a FICO Score. A FICO Score is one of the oldest credit scoring models. While VantageScore was introduced in 2006 as a competitor for the FICO scoring model. Learn more about the history of credit scoring models here.
What Factors Determine a Credit Score for a VantageScore and a FICO Score?
Knowing what factors make up the most common credit-scoring models will be helpful. Here is everything you need to know:
- Your payment history (35% for FICO and 40% for VantageScore)
- Credit utilization rate (30% for FICO, 20% for VantageScore)
- The age of your credit accounts (15% for FICO, 21% for VantageScore)
- Credit mix (10% for FICO, 21% for VantageScore)
- New credit accounts/account inquiries (10% for FICO, 5% for VantageScore)
As you can see, the percentage of how these factors affect each credit score model depends on the model itself. For example, with the FICO model, your payment history makes up 35% of your credit score, while with Vantage Score, it is 40%. You’ll have to find a balance between these factors to get a good credit score.
How Can I Recover My Credit Score Points After a Hard Credit Check?
If you have had several hard inquiries, you may be curious about how you can improve your credit score afterward. You may be surprised to learn that your credit score will recover by itself over time after hard credit inquiries. Still, there are definitely things you can do to fix it faster after a credit score drop:
Work on a Credit Card Account or Multiple Credit Card Accounts
A credit card is the most common type of revolving credit account out there; chances are that you have one or multiple that you are paying back. Paying off a credit card can help your credit utilization ratio in that it will increase your credit limit and chip away at debt at the same time.
Stay Away From New Credit, Especially a Bad Credit Loan or Credit Card
Another thing you can do is to limit new loan options. When you have good credit, you may be bombarded with offers for personal loans, refinancing options, a car loan option, etc. While if you have bad credit, you may come across quick payday loans or car title loans. Either way, you should avoid applying for new loans if you are trying to rebuild your credit score.
Make All Your Payments on Time
Another thing you can do to recover your credit quickly is to pay your bills on time each month. Whether it is a credit card bill, student loan payment, or utilities, it will really help you score if you have a clean payment history!
Credit Scoring: FICO, VantageScore & Other Models
Credit Reports and Scores | USAGov