A person's credit score is determined using a variety of information found on his lending history. This includes the length of the credit history, the timeliness of his payments, and the amount of debt he has outstanding. Credit reporting agencies use this information to determine the likelihood of a person paying back a loan: the more likely he is to repay debt, the higher his score. However, a check of a person's credit report by an outside party will often lower a person's score.
Hard vs. Soft Checks.
A person's credit report is accessible to a number of outside parties with a valid interest in understanding her credit history. These include lenders, potential employers and landlords. When an outside party views a credit score, this is known as a credit check or inquiry. If the party viewing the report is a lender, this check is considered a "hard check"; checks by non-lenders, such as landlords, are considered "soft checks". Each hard check lowers a persons credit score slightly.
Credit Applications
When a person applies for credit, he is generally required to fill out an application. The lender will use information contained on this application to check his credit report. For purposes of credit scoring, credit companies that do not receive an application and check a person's credit score without the person's permission -- such as those companies seeking to issue "pre-approved" credit cards -- do not count as lenders. Their checks do not count as hard checks and do not affect a person's credit score.
Explanation
Although it may seem strange that the act of a lender checking a person's credit will lower her score, to credit reporting agencies, this check signals that the person may be seeking to take out a loan. A desire to take out a loan may signal that she is in financial trouble. For this reason, credit reporting agencies choose to downgrade a person's credit score to represent the increased probability that she will default on one or more loans.
Considerations
Generally, credit checks only drop a person's score several points, when a credit score will range from about 300 to 850 points. In addition, the score drop is only temporary. Also, a series of credit checks in a short time from similar types of creditors -- for example, lenders who all issue home loans -- will signal to credit reporting agencies that the person is shopping for a single loan. These multiple checks are only counted as a single check, with the score dropped accordingly.
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