Your credit score is a critical part of your life. It helps determine the loans you are eligible for and the rates you pay. Insurance companies can also use your credit score to set premiums for coverage like auto.
When you apply for a new credit card, a home loan, or even get a credit card offer in the mail, your credit history is pulled. This is called either a hard or soft inquiry.
Soft inquires typically do not affect your credit score as they occur frequently and sometimes without your knowledge. For example, when you receive a preapproved credit card offer in the mail or a potential employer runs a background check.
Hard inquires occur when your credit history is checked by a lender or credit card company when applying for a loan or a credit card—to name a few examples. Hard inquiries stay on your credit report for two years and typically only lower your credit score by a few points. While dropping a few points shouldn’t hurt in the long run, too many hard inquires can give lenders the impression that you are a high-risk borrower.
Both inquires show up on your credit report.
Many things can affect your credit score, both positively and negatively.
When you apply for a mortgage loan, an underwriter will look at your credit to look at your earnings, debts, and savings. A mortgage pre-approval is a hard inquiry, and because it is required for loans, your credit score can be minutely affected. However, a drop in a few points for a few months is worth it for this critical step in the home buying process. Pre-approval can tell you how much you can afford and how much money you will need for a down payment.
Your payment history has a significant effect on your credit score. Consistently paying your debts each month on time, be it student, car, or home, benefits you by updating your credit report with these positive transactions.
Yes, how old your credit is can affect your credit score. If you’re young and just starting out or have never had a credit card before, your credit score may not be as high as you’d like. It takes time, patience, and sound financial habits to build a healthy credit score.
Checking your credit report is essential in keeping your credit healthy! When there are errors on your report, these can negatively affect your credit score. For example, if you have paid your debts on time each month and your credit report says you missed one, dispute it! This will keep your credit score healthy and your financial history accurate.
Reporting errors can also help prevent identity theft and protect your good name and credit. If you see activity or a name you don’t recognize, report it immediately!
Checking your credit report is free.
It sounds counterintuitive, but paying off a loan can affect your credit score. This is because you reduce your credit mix or the different types of accounts you have, like revolving and installment. A drop in your credit score can also happen if the account you paid off was the only one with a low balance.
It’s important to note that paying off a loan may not have any effect at all for some people—it all depends on their profile.
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