A credit score ranges from 300 to 850 and is a rating creditors use to assess borrower risk in making lending decisions. It’s based on many factors such as how much debt you have, whether you pay your bills on time, how many credit cards you have, any unpaid bills, etc. Your credit score affects most financial decisions that require credit score reviews. For example, buying or renting a car or a home, getting loans and opening new lines of credit all require credit score review and if you have a good credit score the person or company may be more inclined to work with you.
It may surprise you to find out, but you don’t just have one credit score! Your credit score may vary based on who provides the score, the data on which it’s based on, and how it’s calculated. The three major credit bureaus, Equifax, Experian, and TransUnion, may also report different credit scores depending on what combination of the three the creditors and lenders you work with report to. In addition, the bureaus and other credit scoring companies use different scoring models. In general, the number of accounts you have, the types of accounts, your used credit vs. your available credit, the length of your credit history, and your payment history are factored into your credit score. Depending on the scoring model used, the weight of each factor may vary.
Checking your credit score yourself does not hurt it. When you or a lender checks your credit score you will see an “inquiry” on your credit report. There are two types of inquiries – soft inquiries (aka “soft pulls”) and hard inquiries (aka “hard pulls”).
Soft inquiries occur when someone checks your credit score and they have no effect on your score. Regularly checking your credit score is important for making sure nothing is wrong, indicated by a sizable unexplained change to your score. Knowing your credit score before applying for a product will protect you from needlessly incurring a hard inquiry when applying for credit cards or loans you know you won’t qualify for.
Hard inquiries can hurt your credit score in the short term. They happen when a creditor requests to look at your credit file to determine risk. A hard inquiry will stay on your credit report for two years, but it usually only impacts your credit score for a few months. You will see an initial drop in your score following a hard inquiry, but over time the impact will diminish with responsible credit behavior. Sometimes a hard inquiry is unavoidable. In general, you won’t be penalized for several inquiries on your credit report if you submit applications to multiple lenders for one loan to compare rates. However, applying to multiple credit cards and a personal loan in a short period of time could be a red flag that you’re seeking credit you can’t afford.