Why It’s A Bad Idea to Frequently Check Your Credit Rating
Keeping an eye on your credit score is a crucial pillar of good money management, but did you know that it’s possible to go overboard on credit awareness? Since credit inquiries account for only 10% of your overall credit score, and only appear as “soft inquiry” to your credit report, it can be tempting to check often. However, it might not be as harmless of a practice as you’ve been led to believe.
In the 1980s, when lenders and banks implemented the algorithm-based evaluation system we now know as credit scoring, these scores were meant to be kept private from consumers and the general public. Creditors intended to use this information internally to efficiently, reliably assess risk on a case-by-case basis. Before credit scoring, lenders relied on inefficient and unreliable observation of consumer credit behavior. Today, credit scores are easily accessible, but many misconceptions persist, causing a lot of unnecessary panic among people trying to get out of debt.
Hard and Soft Inquiries
Unlike “hard inquiries,” which appear whenever you apply for credit, soft inquiries only occur when you check your own credit report, someone runs a background check, or an institution pre-qualifies you for a particular offer. Hard inquiries can hurt your score, while soft inquiries cannot. No matter how many times you check your score, it will not damage your score.
There are some situations when it is a good idea to pay attention to your rating. For example, if you have a low credit score and are hoping to improve it by paying off debt, checking your score regularly can help you track your progress and keep you motivated. If you’re a student or recent graduate with little credit history and a long financial future ahead of you, it’s helpful to check in periodically so you can see how your credit profile is developing. People with exceptionally high credit scores are also encouraged to monitor their rating to make sure it doesn’t suddenly drop, since higher scores are more susceptible to adjustment than low or average credit scores.
People with six or seven credit cards tend to have lower credit scores than people who use only one or two, since the latter group made fewer hard inquiries. If you already have several credit cards, don’t worry. People who use credit cards wisely and in moderation, and who are diligent with their payments, often see their scores improve very quickly
How Inquiries Affect Your Credit Score
If you apply for multiple loans or lines of credit, this will raise a red flag. It appears that you’re not financially stable, and can lead to creditors charging you a higher interest rate or rejecting your application outright. Additionally, each of these applications is considered a hard inquiry—if you submit too many, you can hurt your credit rating.
Think of it this way: whenever you apply for a line of credit or loan, a creditor receives your permission to put forth a hard inquiry about your credit history. Since hard inquiries can negatively affect your score, repeated inquiries can compound the negative effect, damaging your credit score in the long run.
How Inquiries Lead to Debt
If your credit rating is already poor, you might believe that opening a new line of credit or taking out another loan is your only option, but in the long run, it can lead you even further down the road to debt. Relying on credit to help you will ultimately hurt you more than you can imagine. If you are already burdened by debt, it is a better idea to deal with it now before it becomes any worse.