Consumers are penalized for something as simple as opening a new checking account

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Surprising things that may affect your credit score
3 years ago
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While few of us take our credit score into account when taking such routine actions as opening a new bank account or applying for a credit card, perhaps we should. That is because these simple actions can shave precious points off of a credit score, and that can result in higher interest rates on mortgages, car loans, credit cards and other debt. These simple actions could end up costing you hundred, or even thousands of dollars, so it makes sense to understand how the world of credit reporting and credit scoring works.

The reason that caution is advised even when opening a checking account is that some banks will routinely pull the credit reports of their new clients when the account is being opened. That action alone could damage your credit score if you are not careful.

While it may not seem fair that consumers are penalized for something as simple as opening a new checking account, there is actually sound reasoning behind this tactic, at least from the point of view of the creditors. Those individuals with at least six inquiries against their credit report are eight times as likely to declare bankruptcy as the individual with no credit report inquires. So to the credit reporting agency, noting such inquiries makes perfect sense.

The good news is that a single added inquiry against the credit report often shaves off less than five points from the FICO score, and the importance of any single inquiry will depend in large part on the overall information contained in the credit report. Those with perfect credit will generally incur far less damage due to added inquiries than those whose credit record is more spotty.

In addition, credit report inquiries will generally have a larger impact on young people, and on others just beginning to build a credit history, than on those whose credit habits are more established. Even though credit inquiries are important, the most critical factor remains whether or not an individual pays their bills on time.

Even though the impact may be minimal, it still makes sense for those individuals considering a new checking account to find out how the bank handles such accounts in terms of credit reports. Many banks will check with companies like Chex Systems, Inc., in order to determine if the would be customer has a history of writing bad checks. This type of inquiry typically has no impact on credit score.

What can have an impact on an individual's credit score, however, is when the bank takes the extra step of pulling the credit report. Many banks routinely pull the credit reports of all their checking account applicants, so it is a good idea to ask first if this is a concern.

When it comes to knowing which actions may affect your credit score, it is important to know which actions will trigger a ?œhard??inquiry and which ones trigger only a ?œsoft??one. A hard inquiry will be viewed and evaluated by the credit scoring models, possibly resulting in a change in score. A soft inquiry, on the other hand, will appear on the individual's credit report but will not affect that individual's credit score.

Actions such as checking your own credit report, or being pre-approved for a home equity loan, will generally be soft inquiries and thus will not affect your credit score. Actually applying for that home equity loan, on the other hand, will likely trigger a hard inquiry.

In addition, a credit check made by a potential employer when you apply for a job will count as a soft inquiry and have no effect on credit score. On the other hand, if you contact your credit card issuer and request an increase in your credit limit, you can expect a hard inquiry to result. So too may other seemingly innocuous actions, including signing up for a new gym membership, joining a dating service or taking out a new cell phone plan. All of these institutions sometimes will pull an applicant's credit report, resulting in a hard inquiry and the possible loss of precious FICO points.

So if your credit score is an issue, or if a major purchase, such as a home or a car, is looming on the horizon, it is a good idea to check with any institution with which you are considering a relationship, from the dating service down the street to that great new health club, about their credit reporting process. If a planned action is likely to result in a hard inquiry on your credit report, it may be worthwhile to put it off until after the mortgage or car loan papers have been signed.

By Beconrad
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