Do Credit Checks Really Hurt Your Credit?
You have probably heard from several different sources that having multiple credit checks performed in a short period of time can damage your credit score, making it more difficult for you to secure the financing you need down the road. These people likely can’t tell you how much your score will drop or for how long, though. There are two reasons for this seeming inconsistency in information. For one thing, the dip in your credit score will depend on just how many inquiries are posted and in what amount of time. And secondly, only certain types of credit checks will count against you and potentially damage your credit. Here’s the breakdown on how to manage credit checks effectively in order to reach your goals (without hurting your FICO score).
For starters, you need to know which types of credit checks can lead to problems and why. If you are a student applying for a loan, or an adult with established credit looking to purchase a car or a home, you generally won’t see any change in your credit score, regardless of how much you shop around (and how many inquiries are made), at least not during the process of securing such a loan. However, multiple requests for your credit report made by credit card companies could certainly have a negative impact on your credit rating. But why? Everyone is requesting the same information; why does it matter if the lender is a bank or a credit card company?
The difference lies in the intent. If you’re looking to go to school or make a large purchase such as a house, the money you’re borrowing is sort of like an investment in the future. With a college education, you can hopefully obtain gainful employment down the road, which will allow you to pay off the debt accrued in the pursuit of a degree. And a house (or even a car) comes with built-in collateral that the bank can seize in lieu of payment should you fail to meet your financial obligations. In each case there is a reasonable expectation of repayment of loans. But people who are applying for multiple credit cards in a short period of time are certain to raise red flags.
If you’re shopping around for a credit card, you might think that applying for many to find the lowest rate is the sensible way to go. But keep in mind that the entities that compile credit reports don’t know what you’re up to. They may see a bunch of inquiries from credit card companies and operate under the assumption that you are going to take them all, potentially racking up multiple thousands of dollars in debt that you cannot possibly hope to pay off. In short, you suddenly represent a much higher risk to lenders.
But what is the actual impact to your credit score from such activity? It varies from person to person, depending on your credit history and the number of inquiries made (along with the time frame in which they arrive). As a general rule, you can estimate a loss of five points per inquiry if you want to be on the safe side. How long this drop is in effect depends entirely on you. If you end up accepting a credit card, you spend responsibly, and pay your bills on time, your credit will rebound quickly (within a few months). And you can probably guess what happens if you go the other way.
Emma Martin writes for Granite Card where you can find articles on all things credit related, including bad credit credit cards with high interest rates and hidden fees.
