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Why Does Your Credit Score Drop When Someone Checks Your Credit?
Your credit score is a crucial piece of information that lenders use to determine your creditworthiness. It reflects your financial history and helps lenders assess the level of risk they would undertake by lending you money. However, you may have noticed that your credit score can drop when someone checks your credit. This article aims to explore the reasons behind this phenomenon and answer some frequently asked questions related to it.
When someone checks your credit, it is typically referred to as a credit inquiry. There are two types of credit inquiries: hard inquiries and soft inquiries. A hard inquiry occurs when a lender or financial institution checks your credit as a result of a credit application you have made. This can include applications for credit cards, loans, or mortgages. On the other hand, a soft inquiry occurs when you check your own credit or when a non-lending entity, such as a potential employer or landlord, checks your credit as part of a background check.
Now, let’s delve into the reasons why your credit score may drop when someone checks your credit:
1. Hard inquiries indicate new credit applications:
When a lender performs a hard inquiry, it signifies that you are seeking new credit. Multiple hard inquiries within a short period of time, such as when you apply for multiple credit cards or loans simultaneously, can suggest financial instability or a higher risk of default. As a result, your credit score may drop to reflect this increased risk.
2. Risk assessment by lenders:
Lenders consider your credit score as a crucial factor in determining the interest rate, loan amount, or credit limit they are willing to offer you. When they see recent hard inquiries on your credit report, they may perceive you as a higher-risk borrower, leading to potential adjustments in the terms of the credit agreement.
3. Potential overextension of credit:
If you have opened several new credit accounts in a short period, it may raise concerns about your ability to manage your finances. This can negatively impact your credit score, as lenders may interpret it as a sign that you are taking on more debt than you can handle.
4. Soft inquiries do not impact your credit score:
Unlike hard inquiries, soft inquiries do not affect your credit score. Soft inquiries are generally viewed as informational or administrative checks and are not linked to credit applications. Therefore, you can check your own credit scores as often as you like without worrying about any negative impact.
FAQs:
1. How long do hard inquiries affect your credit score?
Hard inquiries typically remain on your credit report for about two years. However, their impact on your credit score diminishes over time. After a few months, the negative effect usually becomes minimal.
2. Can I avoid hard inquiries altogether?
While it is not possible to avoid hard inquiries completely when applying for credit, you can minimize their impact by being thoughtful about your credit applications. Try to limit the number of credit applications you make within a short time period.
3. Can checking my own credit score lower it?
No, checking your own credit score or requesting a free credit report does not impact your credit score. These are considered soft inquiries and have no effect on your creditworthiness.
4. Will my credit score drop if I shop for the best loan rate?
When you are rate shopping for certain types of loans, such as mortgages, auto loans, or student loans, multiple inquiries within a specific timeframe (typically 14-45 days) are counted as a single inquiry. This allows you to compare rates without significantly affecting your credit score.
In conclusion, your credit score may drop when someone checks your credit due to the potential risks associated with new credit applications and increased debt levels. However, it is essential to distinguish between hard and soft inquiries, as only hard inquiries have an impact on your credit score. By understanding the factors affecting your credit score, you can make informed decisions to maintain or improve your creditworthiness.
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