Credit Score - How It’s Effected With a Credit Check

It's widely known that credit checks can affect your credit score, but how significant is this impact, especially when applying for a mortgage? Let's delve into the details to understand better.

Soft vs. Hard Credit Checks

Credit checks come in two forms: soft checks and hard checks. Soft checks do not affect your credit score, while hard checks do.

A soft check occurs when a financial institution reviews your credit for reference purposes, such as when your bank considers you for a promotional credit card offer. These checks do not require your permission, do not appear on your credit report, and do not impact your score. Checking your own credit also counts as a soft check.

In contrast, hard checks are performed when you apply for credit, including mortgages, and always impact your score.

Impact of a Hard Credit Check on Your Score

Your credit score comprises various components, with credit inquiries and new credit accounting for about 10% of the total score. While an excellent credit score is typically above 700, the maximum score is 900. Interestingly, both a 700 and a 900 score can qualify you for the same mortgage offers. Generally, a score as low as 600 might still qualify you for competitive mortgage rates, though this is evaluated on a case-by-case basis.

The impact of a hard credit check varies but is usually minor for those with healthy credit.

For example, if your score drops from 750 to 747 after a hard check, the difference is negligible. Credit scores fluctuate regularly, and factors like paying off debt can offset the impact of a hard check.

Multiple Hard Credit Checks

You can have multiple hard credit checks within a 45-day period for mortgage applications, and they will only count as a single inquiry on your score. However, each check will be listed on your credit report, visible to lenders and brokers.

It's unnecessary to have multiple institutions check your credit while shopping for mortgage rates. Quality mortgage professionals can provide rate information from multiple lenders without you needing to go to each lender individually.

Beyond the Credit Score

Lenders consider more than just your credit score. While a score in the low 600s might still get you the best rates, approval depends on other factors in your credit report. Similarly, a high score doesn’t guarantee approval if other aspects of your credit history are insufficient.

Maintaining a Strong Credit Profile

To maintain strong credit, it's advisable to have at least two revolving credit accounts, such as credit cards or lines of credit, utilizing a max of 30% of the limit. For example, if your limit is $1000, do not go over more than a $300 balance. Regularly using your credit cards—at least two to three times per year—even for small purchases, can keep your credit active. Inactivity for over a year can weaken your credit, despite a high score.

By understanding these nuances, you can better manage how credit checks impact your score and ensure your credit remains strong for major financial decisions like securing a mortgage.