A credit check is when a potential lender, landlord or employer obtains a copy of your credit report to see if your credit is good enough to qualify. Some types of credit checks lower your credit score slightly, so you should apply for credit only when you need it.
Types of Inquiries
Credit inquiries fall into two major categories: hard inquiries and soft inquiries. Hard inquiries are made after you apply for any type of credit, such as a mortgage, auto loan, student loan, credit card or charge card. These affect your credit score. A soft inquiry, on the other hand, does not hurt your credit at all. This includes inquiries not related to credit, such as a credit check by a potential employer, inquiries by companies pre-screening you for credit card offers, inquiries by companies with which you already hold an account and inquiries you make on your own credit file.
In most cases, one credit inquiry will only hurt your credit score by five points or fewer, according to myFICO. However, if you do not have many accounts in your credit file or have only been managing credit for a short time, an inquiry can have a larger effect. Multiple inquiries also add up to significant damage. The logic behind this is that people who apply for lots of credit during a short time period are often experiencing financial difficulty and therefore, pose a higher risk to lenders.
Rate Shopping Effects
When you are in the market for a mortgage, auto loan or private student loan, you often contact multiple lenders to get interest rate quotes so you can choose the lender with the best rate and terms. The formula that calculates your FICO credit score considers multiple inquiries for the same type of loan as just one inquiry if they are made in a short time period. The time period is either 14 days or 45 days, depending on which version of the FICO formula is being used. In addition, the credit scoring formula ignores inquiries made for the same type of loan during the previous 30 days. For example, if you have one lender pull your credit report for a mortgage rate quote and you visit another lender for another mortgage rate quote a few days later, the first lender's inquiry will not affect your score. This allows you to compare rates on equal footing.
Inquiries stay on your credit report for two years, but the credit score formula only considers inquiries from the past year. Therefore, if you have not applied for credit during the previous 12 months, you will not have any negative effects from credit inquiries.