The vast majority of consumer credit in America is supplied by big banks and other huge financial institutions. These companies have massive databases called credit bureaus with information on over 300 million Americans. By examining these massive datasets, they determine an individual’s likelihood to repay a loan, which is how they gauge their customer’s creditworthiness. FICO and VantageScore are two major competing credit scoring models widely used by lenders today. Generally speaking, a higher score means you’re considered a more reliable borrower—all else being equal. The average American has a FICO score somewhere between 600 and 700, though scores can range from 300 to 850 or more! In general, higher scores are better for individuals looking to take out loans because it makes them eligible for lower interest rates.
After you check your credit, it gets recorded on your report as a hard inquiry. Like any other information that appears on a credit report, hard inquiries affect a consumer’s FICO score. Each hard inquiry lowers a consumer’s FICO score by one point; however, multiple auto loan and mortgage inquiries will not lower FICO scores beyond five points per year. Additionally, some issuers will exclude inquiries within 45 days of each other from their calculations of FICO scores because such inquiries may not be accurate predictors of risk.
Consumers who want to improve their FICO score also need to pay attention to what kinds of accounts they have checked when calculating their score. They should avoid opening new lines of credit during times when they are planning on applying for loans to prevent lenders from assuming they are trying to inflate their creditworthiness artificially. All in all, checking your credit too often or at too many different places hurts your chances of getting future lines of credit approved, which means you could end up spending more money on interest payments over time.
Additionally, multiple checks per month by individuals with bad credit histories may result in additional inquiries being placed on those accounts and thus potentially lower scores. It’s best practice to avoid obsessively looking at any part of your credit history, including your score. Instead, review all three from time to time to ensure they’re accurate and consistent with what you know about yourself from other sources.