In this day and age, anyone concerned with the state of their financial health is well-aware of the power given to the magic three-digit number referred to as a credit score. After all, this magic number is often what stands between individuals receiving a much-needed loan to purchase a new home or car. Bank lenders, potential landlords, insurance companies, and even employers check credit reports to determine if the applicant is financially stable.
Although thousands of Americans live in fear of their credit problems, most have no idea how the three reporting agencies actually calculate their credit score. Depending on the particular agency’s formula, the credit score is mainly affected by payment history, amount of debt, age of all your accounts, new accounts recently opened, and types of accounts. But does checking your credit score lower it and actually hurt your credit?
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Don’t Be Fooled By This Urban Myth
In short, checking your own credit score or report will never negatively affect your score. The idea that keeping tabs on your credit score can actually hurt it is one of the most damaging financial urban myths circulating today. Many people mistakenly fall into the trap and assume that inquiries into their own credit report/score will cause it to lower. This is a very dangerous myth because it has led some to believe that they should only check their scores in moderation.
Truthfully, it is highly recommended that you keep a close eye on your credit score by checking your report at least once each year. The Fair and Accurate Credit Transactions (FACT) Act states that all individuals are entitled to receive a free credit report annually. If you do not mind paying a few fees, it is also absolutely harmless to check your score more than once a year as well. Checking your credit score is essential to catching mistakes by the reporting agency and the symptoms of identity theft early, which in turn protects your credit score.
A Word of Caution
However, there is an important distinction that needs to be made between the types of inquiries that can be made on your credit report – which are soft inquiries and hard inquiries. If a business or lender has a legitimate reason to check your credit score, a hard inquiry will be listed on your credit report. Hard inquiries are notorious for temporarily damaging a credit score, because it indicates to other lenders that you may be in the process of seeking additional credit. While it is true that the inquiry can shave off five points, it’s nothing serious to worry about – these points can be earned back after just six months. Furthermore, taking a little hit to your credit score may be well worth it when you are filing for a needed loan. Just remember to complete all loan applications within two weeks when searching for a lending institution.
On the other hand, soft inquiries that are made into your credit report will not result in any points knocked off your score. While your own inquiry into your report counts as a soft inquiry, some companies and potential employers will also conduct soft inquiries. Instead of locating all of the same information listed on the hard inquiry though, companies will only see a very limited report with a soft inquiry. When you check your own score, you will be able to see the list of all soft inquiries that have been performed and your full report.
Overall, it is essential that you feel comfortable with freely checking your own credit report without living in fear of the score suddenly plummeting. Make sure to check your score at least once a year through the free credit reports you’re entitled to – you can request your report 100% free once a year at the official federally authorized site: Annualcreditreport.com – from all three reporting bureaus and report any serious errors you may find. Instead of hurting your score, it could potentially save your score from the disastrous effects of identity theft or institutional error.