Does Checking Your Credit Report Hurt Your Score?

At Financial Canadian, we often hear the question: “Do credit reports hurt your score?” It’s a common concern among Canadians looking to maintain or improve their financial health.

In this post, we’ll explore the relationship between credit reports and credit scores, and explain how checking your own credit report impacts your overall creditworthiness.

What Are Credit Reports and Scores?

Credit Reports Explained

A credit report is a detailed record of your credit history. It includes information about your credit accounts, payment history, and public records such as bankruptcies or tax liens. In Canada, the two main credit bureaus that maintain these reports are Equifax and TransUnion.

Your credit report contains:

1. Personal information (name, address, Social Insurance Number)
2. Credit accounts (credit cards, loans, mortgages)
3. Payment history
4. Credit inquiries
5. Public records (bankruptcies, collections)

You should review your credit report regularly for accuracy. The Financial Consumer Agency of Canada states that you can request a free copy of your credit report from both Equifax and TransUnion once a year.

Understanding Credit Scores

A credit score is a three-digit number that represents your creditworthiness. It’s calculated based on the information in your credit report. In Canada, credit scores typically range from 300 to 900, with higher scores indicating better creditworthiness.

The most commonly used credit scoring models in Canada are:

1. FICO Score (used by Equifax)
2. CreditVision Risk Score (used by TransUnion)

A good credit score in Canada is generally considered to be 660 or above. However, the definition of a “good” score can vary depending on the lender and the type of credit you’re seeking.

Factors Influencing Your Credit Score

Several factors contribute to your credit score. While the exact formula is proprietary, we can share the general breakdown:

1. Payment History (35%): This is the most important factor. Consistent on-time payments positively impact your score.
2. Credit Utilization (30%): This refers to how much of your available credit you use. Try to keep your credit utilization below 30%.
3. Length of Credit History (15%): Longer credit histories tend to result in higher scores.
4. Credit Mix (10%): A diverse mix of credit types (e.g., credit cards, installment loans) can positively impact your score.
5. New Credit (10%): Opening several new credit accounts in a short period can negatively affect your score.

Understanding these factors can help you make informed decisions about your credit use. For example, if you plan to apply for a mortgage, you might want to avoid opening new credit cards in the months leading up to your application.

It’s important to note that while these percentages are based on the FICO scoring model, other models may weigh factors differently. However, the general principles remain the same across most scoring models.

Now that we’ve covered the basics of credit reports and scores, let’s explore the different types of credit checks and how they can affect your credit score.

How Credit Checks Affect Your Score

Types of Credit Inquiries

Credit checks come in two main varieties: hard inquiries and soft inquiries. Understanding the difference between these two types can help you manage your credit score more effectively.

Hard Inquiries: The Score Impacters

Hard inquiries occur when a lender checks your credit report as part of their decision-making process. This typically happens when you apply for a new credit card, loan, or mortgage. Hard inquiries can potentially lower your credit score by five points or less, according to FICO.

FICO reports that a hard inquiry usually lowers your score by less than five points. However, multiple hard inquiries in a short period can have a more significant impact. This is why it’s advisable to space out credit applications.

Hard inquiries stay on your credit report for two years, but their impact on your score typically diminishes after a few months.

Soft Inquiries: The Harmless Checks

Soft inquiries don’t affect your credit score. These occur when you check your own credit, when a company checks your credit for promotional purposes, or when a current creditor reviews your account.

When you use services like Credit Karma or when your bank provides you with a free credit score, these are soft inquiries. You can check your own credit as often as you like without any negative impact on your score.

Key Differences Between Hard and Soft Inquiries

The main difference between hard and soft inquiries lies in their impact on your credit score and who initiates them. Hard inquiries are initiated by you when you apply for credit and can affect your score. Soft inquiries are often initiated by others for background checks or promotional purposes and don’t impact your score.

A single hard inquiry might only drop your score by a few points, but multiple hard inquiries can add up.

Rate Shopping and Credit Inquiries

Credit scoring models account for rate shopping. If you’re applying for a mortgage or auto loan, multiple inquiries within a short period (14-45 days, depending on the scoring model) are typically counted as a single inquiry. This allows you to shop around for the best rates without excessively penalizing your credit score.

While hard inquiries can impact your score, don’t let this deter you from applying for credit when you need it. The potential benefits of a new credit account often outweigh the temporary dip in your score. Try to be strategic about when and how often you apply for new credit to minimize the impact on your credit score.

Now that we’ve explored how different types of credit checks affect your score, let’s examine the specific impact of checking your own credit report.

How Checking Your Credit Report Affects You

Classification of Self-Checks

When you check your own credit report, credit bureaus classify it as a soft inquiry. This classification means it has no impact on your credit score. You can check your credit report as often as you want without any negative consequences.

Soft credit inquiries check the information in your credit report without affecting your credit rating. This applies whether you check your credit report directly through Equifax or TransUnion, or use a third-party service.

Frequency of Checking

You can check your own credit report as often as you like without impacting your score. In fact, more frequent checks can provide several benefits. The Financial Consumer Agency of Canada recommends checking your credit report at least once a year.

However, it’s beneficial to check your credit report more frequently, ideally once every few months. This practice allows you to stay on top of any changes and quickly identify potential issues.

Benefits of Regular Monitoring

Regular monitoring of your credit report offers several key benefits:

Impact on Credit Applications

While checking your own credit report doesn’t hurt your score, applying for new credit results in hard inquiries. Use the information from your regular checks wisely to minimize unnecessary credit applications.

Credit Monitoring Services

A reputable credit monitoring service can help you keep track of your credit report. These services often provide alerts for significant changes, making it easier to stay on top of your credit health.

Final Thoughts

Checking your own credit report does not hurt your score. This action counts as a soft inquiry and has no impact on your creditworthiness. Regular monitoring of your credit report helps you detect fraud early, identify errors, and make informed financial decisions. You should check your credit report frequently to maintain good financial health.

Hard inquiries, which occur when you apply for new credit, can temporarily lower your score. To maintain a healthy credit score, you should pay bills on time, keep credit utilization low, and avoid excessive new credit applications. Your credit report reflects your financial habits, so you should cultivate positive ones.

At Financial Canadian, we understand the importance of a strong online presence in today’s digital world. We offer comprehensive web design services to help you establish a powerful digital footprint and drive business growth. You should focus on both your credit health and your online presence to set yourself up for a stronger financial future.