Your credit score is there to give lenders an idea what risks they are taking when doing any kind of transaction with you. It’s not just lenders who would want to know your score. Even other people like potential employers, landlords, and debt collection agencies would want to know of your current financial performance.
But this does beg the question, do too many searches into your credit report actually affect your score in the long run? The short answer is yes. A more nuanced answer, however, would require you to learn a few things more about how credit searches work.
The Credit Score Pie
To really understand how searches affect your overall score, you need to think of your score as a pie (the graph, not the food). As a pie, that means you can break it down to its most basic of components. The biggest portion of that pie (somewhere at 40%) is your credit card utilisation rate i.e. the frequency of the use of your credit card in comparison to your available credit.
Another large portion is your payment history at 20%. The rest of the pie then (at roughly 25%) would be filled up by your credit transaction history, the types of credit on your account, and any demerit or unfavorable mark your account gets in every credit report.
The smallest portion of that pie at 5% would then be relegated to credit searches. Every time you or someone else makes an enquiry on your financial performance, that action would affect this small portion of your score. But how does that exactly happen? To answer that, we must identify the different credit searches.
The Soft Enquiry
Also known as a soft pull, a soft enquiry or search usually occurs when people check your credit status as part of a simple background check. For example, a card issuer might want to check if you are qualified for certain offers that their company has. To do this, they would check on your credit score for any pertinent information.
Also, you might be applying for a position in a company and the employer makes it a point to check if you can be trusted with money, given the nature of the work you are applying for. They would look for your credit history to see if you have any outstanding debts or if you are diligent enough with paying the same.
Fortunately, soft searches have negligible effect on your credit score, if any. The reason for this is that soft searches cover only information that is not connected to an application of a new credit. Depending on the credit agency that handles that credit score, such searches may or may not even be recorded in your own report.
The Hard Enquiry
A hard enquiry occurs when big institutions like lending companies and credit card issuers would want to check on your financial standing first before making a big decision. These types of enquiries often happen when you apply for mortgage or a new credit card or even a loan with a 4 to 5 digit figure amount. Unlike soft enquiries, hard enquiries never happen unless you yourself authorise the company to do so.
The reason for this is simple: hard enquiries can affect your credit score considerably depending on what the company asked for. A single hard enquiry might be negligible as far as its effects on your credit score are concerned but multiple ones conducted within a short time period would negatively affect it eventually.
Fortunately, the effects of a hard credit enquiry to your score does not last that long. In most cases, the effects of a hard enquiry would fall off 2 years after the enquiry was made. However, this would not look good for potential issuers as multiple enquiries on your score implies that you may be short on cash and are about to make a lot of debt. The higher the risk is to do business with you, the unlikelier it will be for companies to approve of your applications in the future.
How Frequent Do Hard Searches Have to Be to Affect Your Score?
There is no hard and fast rule for this as hard enquiries are treated differently depending on what you were applying for. The most lenient of these would have to be car loans and mortgage loans enquiries as they are counted only as one point by many credit scoring systems provided that they fall within a short period of time like 7 to 14 days.
Credit card applications, however, are a bit more strict. Every time you apply for one credit for one company, a hard enquiry made by that company counts as one. This means that if you are applying at multiple companies for the same type of credit, and within a short span of time to boot, your credit score is going to drop by a few points in your next report.
Minimising the Effects
It is apparent that hard searches will give you the most trouble with your credit score which is why you need to find a way to mitigate its worst effects. For starters, you should space out your applications evenly. If you, for example, apply for a loan this week, don’t apply for a new credit in the next few days or weeks.
Next, if you can’t avoid doing multiple applications in a short period of time, you need to make sure that at least one or two of those applications feature low interest rates. There are some credit companies out there that do allow for grace periods before they factor in search enquiries to your most recent score.
However, the best method for you to minimise your encounters with hard searches is to never “shop around”. The time you spend transacting with that company should not be the time for you to start looking for the best deals in the market. The company always assumes that you know what you are signing yourself up for and have decided to do business with them solely.
With that in mind, do you research for every loan or credit you apply for and only start dealing with a company once you have made the best possible decision. The less you hop around from one credit company to another for your applications, the safer your credit score will be.
In Case of Unauthorised Hard enquiries
It is highly recommended that you check for errors in your report from time to time as one of the lesser known problems might be an authorised hard search. You have to keep in mind that no hard searches should be done on your account by a company without your permission.
Why was there an unauthorised search in the first place? There are two possible explanations. The first is a mere misunderstanding between you and the loan/credit company. They might have conducted the search on the understanding that you agreed to it when, in fact, you didn’t. Either way, your consent to the search must be expressly given, not implied.
The other, more serious reason would be that the search itself was authorised. It’s only just that you were not the one who authorised it. This is a telltale sign that somebody got hold of your information and had been making loan and credit applications using your identity.
In either instances, it is necessary that you dispute the search as soon as you can. Doing so will notify the issuing company that there were discrepancies in the application and work towards a favorable solution with you. This is quite important in cases of identity theft as you would rather not want any action made by that impostor forever reflected in your credit score.
Any changes made by the company that has placed the entry on your credit file must occur within 28 days of the issue being resolved on their case files.
Of course, there is the chance that the company would insist that the enquiry was completely legal. In this case, you could always contact the Financial Ombudsmen Service to arbitrate the case for you and the company. The process might take longer and there is no certainty that you would win but at least your dispute can be properly heard and addressed.
Just keep in mind, however, that you can only dispute hard searches that were not authorised by you. In other words, you can’t use the dispute process if your aim is just to make your credit score look better.
It goes without saying that your credit score can help you or hurt you depending on the rating. Either way, the final figure there will impact you in some transactions you will make.
This is why being decisive in your transactions can ultimately help your credit score. The less you flip-flop between lending and credit companies before sending in an application, the fewer hard searches will be made on your account.
A lot of vigilance when it comes to monitoring your credit history will also help in the long run. So as long as every search made into your account is authorised, the ending figure on the report would accurately reflect you as far as your financial activities are concerned.
Do you know of other ways to limit the effect of hard searches on your credit score? The comments section below is the best time for you to share your thoughts.