Consumers may access their credit reports for free once a year, according to the Federal Trade Commission, if they use the Annualcreditreport.com website. They may buy additional copies directly from Equifax, Experian and TransUnion. These self-inquiries do not affect their credit scores. Banks, credits and other companies conduct credit report searches when a person fills out an application. These inquiries do affect the score.
Definition
A credit score is a three-digit number meant to predict a consumer's likelihood of defaulting on bills within the next two years, Leslie McFadden of the Bankrate financial website explains. Credit card issuers, loan and mortgage companies and other creditors use credit scores to make credit-granting decisions. Some also base their terms on a person's credit score, charging more interest or higher fees to those who pose a greater risk according to their numbers.
Features
FICO is the dominant credit score provider and calculates its numbers through a mathematical algorithm based on a consumer's financial records and activities, McFadden explains. FICO considers factors like the number of accounts, their balances, credit limits, timeliness of payments and types of credit used. It also looks at the number of recent inquiries on a person's credit reports.
Effects
Inquiries in response to credit applications can bring down a credit score by as many as five points, according to the Lending Tree loan website. This effect lasts for about six months. The impact is not as great on people who start with high credit scores, but it can bump borderline people into the sub-prime borrower category. They might be denied, or the lender might offer them a higher interest rate account.
Prevention
Lending Tree advises against getting new credit cards just to get discounts or gifts. For example, retailers sometimes offer 10 percent off a purchase if a person opens a store credit card account. The immediate savings is offset by the credit score impact, and the FICO credit score company warns that too many accounts also hurt the score.
Considerations
Some credit searches do not affect a person's credit score. Lending Tree explains that searches in response to applications are known as "hard inquiries," but there is another type called a "soft inquiry." This happens when a bank or company checks the records of a current customer or pre-screens records prior to sending out solicitations. Soft inquiries do not influence credit scores at all.
FICO states that scoring models take "loan shopping" into account. Many consumers apply with several creditors within a short time for large loans like mortgages or vehicle purchases. These searches result in hard inquiries, but they are treated as a single inquiry, so their credit score impact is minimal.
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