The other night on Chicago Tonight they were discussing identity theft (the context was this ChoicePoint business) and the new free credit reports that Americans can get this year. The host asked the experts whether these credit inquiries wouldn't reduce people's credit ratings, since generally inquiries have an effect on your credit rating. One expert (a professor at NWU's law school whose name I can't remember and unfortunately couldn't find) sort of dodged the question by saying that if everyone around the country asked for a credit report, this wouldn't be a problem, because the scores are calculated relative to others' scores. The big problem with this explanation is that there will be defectors -- there's a major incentive here not to get the credit report when everyone else is going it. So that didn't make any sense.
At any rate, I've been noodling around the internet, and it turns out the "expert" was wrong. There are actually two kinds of credit inquries, soft and hard; and only hard inquiries, made for example by credit card companies when you open a new account, affect your rating. Soft inquiries, including inquiries by individuals and potential employers, don't have any effect on scores. I mention this beause it seems to be a common misconception.
Also, I can find no evidence (see, for instance, here, here, and here) that credit ratings are calculated relative to others' scores. They may be treated relatively in the market, so that if everyone's score suddenly declined, lower scores would be accepted for the same transactions. But this is a market effect, not part of the score itself, and presumably there would be a considerable lag.
MORE: Sweth fleshes this out considerably in comments.
Soft inquiries definitely don't affect credit scores, and credit scores aren't even treated relatively by the market--the rates are determined by the return that the lenders' investors demand for a given level of risk, and the credit scores inversely reflect that risk; if the entire population suddenly became riskier to lend to, then the investors would demand that higher level of return just the same, because they would still have just as many non-lending options for investing their money. Of course, people taking advantage of their right to check their own credit scores doesn't actually make them any riskier, and FICO et al know that, which is why they make a distinction between hard credit checks and soft checks in the first place.
(Even if checking your own credit did count against you, each hard check only lowers your FICO score by ~3 points for 2 years. For a mortgage, very roughly speaking, you can expect that each point lower your credit score goes, you will pay a ~0.01% higher rate, and each 1% higher rate equates to ~$64/mo more that you pay per $100k of the loan. So someone taking out a $300k mortgage to buy a house would end up paying an extra ~$70/year for that 3 point ding to their credit score. IMHO, that would be more than worth it to get confirmation of your current credit info on a semi-regular basis.)
(And for people who are afraid of shopping around for rates because of it would cause multiple such dings to their score--FICO explicitly states that they count all mortgage-related checks within a 30 day window as a single inquiry for credit score calculation, and likewise for auto-loan-related checks. So rate shop away, as long as it's for just a few weeks.)
Thanks for the further detail, Sweth. It hadn't occurred to me that other lending options would remain available even if the population as a whole grew riskier, but obviously this would be the case, and people would just lend less. I suppose you could do some kind of comparative study across different legal systems (with better and worse lending contract enforcement) to see this effect.
The big difference isn't lending contract enforcement; it's actually the presence of a strong secondary mortgage market. In most countries (and in the US until Fannie and Freddie were created), mortgage lending is disconnected from the rest of the capital market, so a riskier lending environment could result in the market readjusting what its acceptable level of risk for a given return is. Since most loans now are "conventional" loans that Fannie and Freddie can buy from the original lenders, bundle together, and then resell as, say, "$1 million of loans with a return of 4%", US mortgages are now essentially backed by a bond market, and so investors can move their money back and forth from that market to traditional capital markets like stocks and other bonds, meaning mortgages have the have to meet the same risk-return criteria as other investments.
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