Eli5, Why does a “hard pull” on my credit negatively effect it?

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I went down the rabbit hole on credit scores and the current way America handles credit for fun and curiosity. At no point have I found a explanation as to why a hard pull on my credit negatively effects it. I understand how it does lt but whats the WHY behind it? Why does a lender looking at my credit force it to go down? It dosent make sense to me. Again, I understand how it works just not why it works like that, what’s the justification?

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For the same reason everything that negatively effects your credit does; because statistically it creates risk.

Across hundreds of millions of consumers, and billions of data points, the credit agencies actually do a pretty good job at calculating which behaviors increase risk and which decrease risk (people with bad credit hate to hear that). They’re so good at it that they actually even find risk that is politically….undesirable. And have in some cases been prevented by law from using certain factors. That’s the main product credit rating agencies sell: a risk assessment.

If you were my friend and came to me and asked to borrow $1000 but said you’d pay me back in three months, but minutes before you got to my house four of my other friends sent me messages saying “hey Tom just asked me for $1000” it might make me rethink letting you borrow the money, because you sound desperate, and desperate is risky.

A credit score is basically a method of trying to quantify how likely you are to be able to pay back a debt. People with high credit scores are more likely to be able to borrow larger amounts of money and pay it back, while people with low credit scores are probably going to be riskier and only able to pay back smaller debts if at all. Lenders want to know this score because they can use it to inform the rates and amounts of money they are willing to lend individuals.

What precisely is taken into account in calculating credit scores can be something of a mystery. It is something of a trade secret because there are multiple private companies which produce credit scores and lenders have their choice of which they look at so they have an incentive to be useful, which is to say accurate.

So why does a hard credit check affect the score? Hard checks are made when a financial institution is using the score to make a lending decision, and it is possible to reasonably infer some information from such an event. If someone is trying to borrow then they are presumably becoming a bit less capable of paying back debts. By taking on some debt their ability to repay *new* debts decreases, so the score should reasonably drop to reflect that. The credit score companies are working with limited information so something could have happened to their financial situation they don’t know about.

A hypothetical situation to illustrate this is imagine you have a buddy named Bob. Every Friday you go out for drinks and he borrows $100 from you, but pays it back on Monday since that is when his paycheck comes through. Everything works out, he just needs you to spot him for the weekend. But one week you hear that Bob is asking other people to borrow $75, $50, whatever when he didn’t before. Now when he comes to you asking for the usual $100 what do you think about the chances of being paid back? Now you might worry because obviously something is going on with Bob where he wants to borrow, even if he didn’t actually get the loans. And if he *did* get the loans then now he is going to be less able to pay back your $100 than usual!