What You Need to Know About Credit Checks

Credit checks are usually a harmless and insignificant part of your credit history, but they can quickly become a problem for borrowers. This, however, depends on the type of checks that you consent to from a creditor or lender. Hard inquiries are the only ones that can cause damage, so you would do best to limit them as much as possible.

Types

The credit reporting bureaus recognize three types of credit checks: soft, hard and personal. Soft inquiries, such as those related to an employer or credit account you did not apply for, won't count against your score. Hard inquires can do up to five points of damage and result from applying for credit and other creditable accounts, such as an apartment and cell phone service. Personal checks count as a soft inquiry and coincide with you checking your own credit or a third-party monitoring service checking on your behalf.

Significance

A single hard inquiry barely makes a dent and should not alarm you. The real damage comes when you have six or more on your report. FICO data shows that a credit file with six or more inquiries has eight times the chance of declaring bankruptcy as a normal person. This phenomenon occurs because people in dire need of credit or those preparing for a financial disaster usually put in a rash of applications in short timespan.

Considerations

Hard inquiries can only stay on your file for two years, but how long they affect your score depends on the scoring system your lender uses. The FICO model counts hard inquiries for one year, but the VantageScore factors in inquiries for as long as the agencies report them. While negative items usually recede in impact as time passes, inquiries usually have a consistent effect on a score in any model.

Tip

Most creditors calculate your score using some version of the FICO formula. The latest version as of 2011 -- FICO 08 -- allows consumers to rate shop for 45 days. This means the scoring model counts all inquiries related to a certain type of loan as one, so you can get as many offers as you want without causing much harm to your score. This typically only applies to auto and student loans and mortgages -- not revolving accounts like credit cards. Find out which FICO version your lender uses to plan your rate shopping appropriately.

Disputing an Unauthorized Check

Only authorized checks may appear on your credit report for other lenders to see. If you see an unauthorized check, dispute it with the credit bureau and/or ask the lender to tell the agencies it was done in error.