Every day, Equifax and TransUnion, the two credit rating agencies, receive millions of pieces of information about citizens, as well as thousands of requests for verification. Is it, however, harmful to check your credit score? How much damage does a credit check cause? When it comes to credit checks, how does the rating system work?
Examining your credit score without harming it
Does checking your credit score affect your credit score? There are so many urban legends about credit reports that many people are afraid to check their own. However, because it can be difficult to improve your credit score, you should be certain of what you can do without lowering it.
The effect of a credit check on your credit score
When you check your credit report, this does not affect your rating because this procedure is not considered a credit application, but rather a soft inquiry. You can, and should, check your report on a regular basis because the data that appears there is frequently updated and mistakes are numerous – and yet, this is the only way for you to detect and correct false information and fraud affecting your finances.
Verification of insurers and tax services
Credit checks requested by tax authorities or the police are also unaffected. Insurer verifications are not considered credit applications and have no effect on the score. Indeed, insurance companies frequently request verification of credit scores because there is a link between credit rating and number of claims. Although you are not required to do so, you have every reason to let your insurer check your report if it is good: this will allow you to get better rates and loan terms from banks.
Checks from financial institutions
Finally, soft credit checks performed by institutions to update their data for a bank account you’ve already opened with them have no effect on your credit score: these aren’t credit applications, but rather verifications to determine if you’re eligible for a promotion or an increase in your credit limit.
Credit checks have an impact on credit scores
In Canada, does checking your credit score lower it? Yes, credit applications generally have a negative impact on your credit rating, even if one or more of them are approved. Even if you can find a loan with a bad credit score through some institution, it will be difficult. Several things should be avoided to avoid unnecessary verifications that cost you points on your score.
What should you avoid?
- Mortgage applications and loan shopping at too many lenders (personal loan, student loan, auto loan, etc.) in a short period of time
- Applying for too many credit cards, as the merchant will also check your credit report. Ideally, you should keep your credit history to no more than two
- Meeting with your financial institution before you have independently verified your debt ratio. Calculate your debt ratio before applying for credit, and don’t ask your bank if it’s higher than 40%: you’ll avoid negatively impacting your rating for no reason, because your financing will almost certainly be rejected anyway at this rate.
Some verifications are required
You cannot, however, avoid some of the verifications that affect your credit score, such as:
- You apply for a loan to purchase a new car,
- You switch phone service providers,
- You obtain a mortgage pre-approval,
- You apply for a new credit card.
How can you reduce the impact on your credit score?
However, by combining the loan applications over a maximum of two weeks, they will be considered a single application, minimizing the impact on the score and optimizing the chance of finding a potential lender. These applications will still have an impact on your rating, but much less so than if they were spread out over a year. Some companies also provide alternatives for finding a loan with a bad credit score.
Check your report on a regular basis
Not all credit verifications have the same impact on your credit score, especially soft checks from insurers, credit file updates, and those you perform yourself. You should therefore check your report on a regular basis so that you can detect incorrect information in your payment history and potential fraud and have the data corrected if necessary.
