Why do credit checks affect my credit score?

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The reason why inquiries affect borrowers’ credit scores is because lenders see credit inquiries as a sign of potential distress. Borrowers who skirt from lender to lender looking for approval on personal loans (or other types of financing) may be in debt and looking for financial help. Because of this possibility, the algorithm used by credit rating bureaus dings consumers for making multiple inquiries.

There’s an obvious problem with this reasoning though: inquiries are required by lenders before consumers find out a lenders offer, and if consumers want the best deal they must solicit offers from multiple lenders.

As a result, those seeking the best interest rates on auto, mortgage, student, and personal loans all must willingly subject themselves to a credit ding. While that credit ding is minor, it’s still a negative consequence to wise behavior—and if we’re trying to promote financial responsibility, penalizing people for responsibly shopping around is nothing short of unacceptable.

For those interested, borrowers looking for the best rates on personal loans usually only need to keep their scores in the mid 700’s.

Keep in mind though, not all credit inquiries receive a credit penalty. Credit checks are broken into two categories: hard inquiries and soft inquiries.

Hard inquiries are credit checks used for services that have the potential to contribute to a borrower’s debt. Applications for credit cards and personal loans (of all types) are examples of hard inquiries.

Soft inquiries are credit checks used for other purposes that will not contribute to a borrower’s debt. When consumer’s are required to get a credit check for employment, when consumer’s run a check for their own personal education, or when a consumer’s credit is run without their express permission—as when credit card companies “pre-approve” of people they solicit their services to—then credit bureaus ignore such inquiries.

Regardless of the type of inquiry made, all credit checks remain on a person’s credit record for a full two years. However, most credit bureaus will only consider inquiries made within one year when determining a consumer’s current score.