Many actions affect the information that shows up on your credit report, which is used to compile your credit history. Your current accounts and the way in which you use and pay them is a major influence on your credit score. In addition, applying for new credit can have an impact on your credit score as well.
Definition
Your credit reports and credit score are two different but interrelated items that affect your ability to get loans and credit cards. The information is compiled by the three credit bureaus, TransUnion, Experian and Equifax, which gather information from lenders and other sources. These documents contain basic demographic and job information and detailed data on your credit accounts. The bureaus calculate three-digit credit score numbers based on reports, as does a company called FICO, the most widely used scoring firm. The score is a quick indicator of your likelihood of paying back loans.
Effect
Everything on your credit reports factors into your score, including inquiries resulting from credit applications. Your score can drop by a few points whenever you apply for a new account and the creditor checks your records. The exact number of points lost depends on your initial score, but the result is usually five points or less. You do not lose extra points for making several applications in a short time frame while shopping for big loans like mortgages or car financing.
Considerations
A soft inquiry is another type of inquiry that shows up on your credit reports, but Bankrate columnist Don Taylor explains that it does not cost you any points on your credit score. It is only visible to you and results from your own credit report orders or pre-screening by creditors and insurers who want to send you solicitations. Soft inquiries are invisible to lenders and have no affect on credit score calculations.
Monitoring
You are entitled to see your credit scores, although the law does not force FICO and the credit bureaus to provide them for free. You can purchase them from the bureaus or FICO if you wish to check your credit standing. The Federal Trade Commission website explains that you are legally allowed to check your credit reports for free every 12 months through a website (see Resources). The reports do not show your scores, but they give you a general idea of your standing because they list inquiries and other items, like late payments, that deduct points.
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