It's so important to have, at the very least, a general awareness of your current credit score and situation. Before you can take steps to fix or improve your score, and to tidy up any errors on your reports, you've got to know where you stand. This can be a bit of a conundrum, because there's a lot of false information floating around, and often times people don't really know how the whole credit score system even works until they've finally taken the time to learn about it. If that's why you're here, kudos to you. Pat yourself on the back, but also roll up your sleeves, because there's still a lot of work to do.
One of the most common questions we hear is an overall concern from people who are wondering if it's going to ding their credit score when they check it. This can lead to the belief that you're better off not checking it, and just leaving well enough alone, but that's an incorrect way of going about this.
To understand whether or not checking your credit score has a negative impact, it's important to understand that there are two different types in inquiries with two very different outcomes.
- Soft inquiries: This is when you simply check your credit score and view your reports. This does not have a negative impact, in fact you can do it every single month if you'd like to, and you don't mind paying the monthly fee. For all intents and purposes, we can answer the the question for this article by simply saying “No”, but it would be irresponsible to leave it at that, because there's another type of inquiry that you'll come across very often that CAN damage your score.
- Hard inquiries: This is the other type of inquiry, and it can have a negative impact on your credit score. A hard inquiry takes place when you're applying for new credit, whether it's a credit card, a car loan, or any of the other numerous possibilities out there. If you're shopping around for credit, and causing hard inquirt after hard inquiry in too short of a time span, this can start to raise some red flags.
Why Are Hard Inquiries Bad For Your Credit Score?
These types of inquiries, with any kind of unusual patterns to them, will start to raise red flags because in some cases, if someone is looking to completely max out all of their credit, they'll start applying for all sorts of new products in a short period of time. They're trying to open up as many new credit accounts as possible, so that they can take the money, sometimes to pay off a gambling debt or an addiction, or sometimes just to try to disappear.
Just because you've applied for a lot of products in a short time, that doesn't mean you're a criminal or that you're looking to rip anyone off. There are legitimate reasons to seek out new credit, but if it happens at a high frequency in a short period of time, it makes them start to wonder what's up, understandably. As you try to open all these new credits, it basically just asks the question “Why?”, and that can worry lenders, and since this is one of the criteria for your score, it can actually lower it – which'll make it even more difficult to open new credit accounts.
This doesn't mean you should be afraid to apply for credit, just make sure that it's actually credit that you need, not just some random spur of the moment new store card so that you can save a couple bucks on your purchase or get a free box of cookies. Car loans, mortgages, credit cards, it's okay to apply for these things and to create those hard inquiries, just don't use it as a way of “shopping around for better rates”.
Why Don't Soft Inquiries Do Any Damage?
It would be very malicious if the credit agencies could punish us for looking at our own scores. It could lead to all sorts of conflicts of interest and general confusion, in an area that's already very confusing for many Americans. We need more people to be financially-literate and on the ball, and checking your score is one of the very first things you've got to do when it comes to that, so having any kind of punishment, especially when having a higher score can save you so much on interest rates, would just be counter-productive.
Another type of soft inquiry that we havne't mentioned yet is when a lender will check your credit score for “pre-approval”, or to see if you quality for a special marketing offer. This is different than a hard inquiry, as it's more of a “what if” type of scenario rather than saying “Okay, I'm officially accepting this debt.”
5 Common Myths About Your Credit Score
There's a lot of misinformation floating around when it comes to credit scores, checking them, improving them, and everything in between. We could spend ages going over all of the various myths, but here are the top 5 that impact the largest quantity of people.
1. “That you don't need to worry about it unless you've missed payments or done something wrong”
A surprisingly high amount of credit reports include errors, and those errors can be hurting your score and forcing you to pay higher interest rates than you should be. These errors can be all sorts of things, including strikes against your credit report for debts that aren't even yours. It's free to check your credit score once every year, and you should definitely take advantage of this, at a minimum.
2. “You should close out your old credit cards after finally paying them off, to wipe them off your record”
On the contrary, once they're paid off, especially if they're older, it can be a better idea to keep them open. One of the factors in your credit score is the average age of your accounts, so if you have a credit card that's older, it's generally a better idea to keep it open. On the other hand, it might not be the worst idea to close a newer credit card if you're looking to trim things down a little bit.
3. “Running a balance on your credit cards will help your score”
There's a common misconception that it's bad to pay off your credit cards, and maintaining a balance that you continue to slowly pay off monthly is better. It's not. If you want to pay a lot of extra interest, that's about all you'll gain from this half-baked strategy.
4. “If you check your report and there aren't any errors, you're all good”
This is not necessarily the case. If you check one credit report, and it's all good, that's not the end of the road just yet. Chances are your other ones will be okay, but it's very possible that one of the two you haven't checked yet could contain a grave error. Remember, you've got to check your report with each of the three major bureaus. If you haven't checked with Experian, TransUnion, and Equifax, then you haven't checked.
5. “You need to pay expensive monthly fees to monitor your credit”
Some companies, including the credit monitoring bureaus themselves, will try to up-sell you on all sorts of additional services beyond your free credit report, and you really don't need these. Essentially, it's a similar cost to if you were to buy a report every single month, but then factor in that you need reports from all three bureaus, and it gets too pricey. Staying on top of things, doing your yearly reports, and hiring a quality credit repair company if there are any errors to take care of, will be more than enough, and quite a bit more than most people ever end up doing, so you'll be well ahead of the game.
Credit repair companies do charge monthly fees, and it's more expensive than basic monitoring, but they're actually working hard to improve your score, and in turn to save you a small (or large) fortune on interest. A slight improvement in your credit score can mean huge savings throughout your financial life. Just an extra couple of tenths of a percentage, once you factor in compounding interest, can add up to a lot. Therefor, it's good to stay prudent and on top of things when it comes to your credit score.