Recently, while doing some research on mortgages, I came across this paragraph on QuickenLoans.com:
“To get the ball rolling on your new payment, we need your credit score. This is something every mortgage company requires. The credit check only takes a few seconds, and it only lowers your score a few points.”
What?? I had to read it again, and then a third time. Checking your credit score can lower it? How can just checking up on something hurt it? That’s like saying that looking at your houseplants causes them to wilt. Isn’t part of being a responsible adult keeping an eye on your credit score? It didn’t make sense to me that checking it could actually cause it to go down. And if I remember correctly, they didn’t say anything about that in the catchy commercials from FreeCreditReport.com. (The songs from those commercials used to always get stuck in my head, so I feel like I would remember something like that.)
Hard Inquiries vs. Soft Inquiries
I decided it was time to do a little bit of digging. While trying to contact my long lost friend who works for a company like the North Shore Advisory, I found this article: LendingTree, it pointed out that there are actually two different types of inquiries that can be made when checking your credit score: a hard inquiry and a soft inquiry. Soft inquiries don’t affect your credit score, but hard inquiries may bring it down a few points. That still seemed strange to me, but at least I was learning new information.
As I kept on reading different articles, the reason that hard inquiries hurt a credit score became clearer. It has to do with the reason that the inquiry is being made. As this article from Credit Karma says, “Soft inquiries typically occur when a person or company checks your credit report as part of a background check.” So, in other words, a soft inquiry is basically when you or someone else looks at your credit score to help get an idea of you or your financial history. And in response to my earlier questions, no, checking your credit score won’t hurt it, and yes, it is part of being a responsible adult. Hard inquiries, however, usually occur when you are looking for more credit. If you apply for a credit card or a mortgage, you will typically need to have a hard inquiry because you are trying to get more credit, and this may bring your score down a few points. Credit Karma goes on to say that “Your credit score may be penalized for multiple hard inquiries because applying for too much credit at one time may indicate that you're desperate for credit or aren't able to qualify for the credit you need.”
The good news is that the damage done by a hard inquiry typically goes away in a couple of years. (It would be better news if it didn’t cause any damage at all, but what can you do?) But reading this article brought on a new question: does having a perfect credit score mean never being able to do anything that calls for a hard inquiry?
Having Perfect Credit
That question led to my next google search, “How to Have a Perfect Credit Score,” which led to this article from TheStreet by Jeremy Greenfield. It turns out that the highest credit score you can have is 850, but even so, the idea of a “perfect” credit score is still somewhat relative. There is no special prize that banks or mortgage lenders offer for having a credit score of 850. Many times, they’re looking for a range, such as 780 or higher. That means that you don’t necessarily have to have a score of 850 to have “perfect” credit. If your credit score is already excellent, even if a hard inquiry lowers it by a few points, you’re still going to have a credit score in the perfect range.
As Greenfield says in his article, when lenders check your credit score, they are trying to answer the question, “What is the likelihood that this consumer is going to go delinquent on this debt within the next 24 months?” If you have an excellent credit score, they can assume that you’re going to pay your bills on time. If you have a poor credit score, chances are you’ve missed some bill payments in the past, and the lender assumes you might do so again.
What does it actually take to have a perfect credit score? Greenfield sums it up in one simple sentence: “Don’t borrow too much money too often and pay all your bills on time, for a long time.” So are you getting a hard inquiry because you’re trying to get a mortgage? Not a problem, as long as you don’t get too many hard inquiries too often and stay on top of your bill payments.
Checking Your Credit Score
You don’t need to tiptoe around checking your credit score - checking it yourself won’t lower it, since that’s considered a soft inquiry. Checking it yourself is actually a good thing, as it may give you an idea of what rates you can expect or how likely you are to be approved for a mortgage. You can use a website such as LendingTree to check your credit score for free! LendingTree also has resources for building and improving credit.
Experian also lists five reasons why you should check your annual credit report. These reasons are:
- It’s free. (And who doesn’t love free stuff?!)
- It’s an important step in rebuilding and maintaining good credit.
- It’s an important part of managing your personal finances.
- It’s often the first indicator that you are a victim of identity theft.
- It’s the first step in correcting any information you feel is inaccurate.
With that knowledge in mind, why wouldn’t you check your credit report and credit score?!
(Also, in case you didn’t know, credit reports and credit scores aren’t the same thing. Credit reports contain specific information about your credit history, while credit scores are created off of the info in your credit report using a credit scoring model. Basically, one is a report and one is a number, but both are important.)
And since we’re talking about credit scores and credit reports, here’s a compilation of those FreeCreditReport.com commercials. Good luck getting those tunes out of your head!