If you’ve ever applied for a loan or bought a car or house, you’ve probably been subject to a credit check. What does that mean, though, and how does it affect you? A credit check is an inquiry often made by lenders and creditors into your credit history. Lenders use credit checks to determine your creditworthiness. They want to know if you’re able to handle borrowing more money and if you have a history of making payments on time.
Lenders check your credit by obtaining credit reports from the major credit bureaus — Experian, TransUnion and Equifax. Credit reports are updated regularly and feature information provided by companies that have already loaned money to you. These credit reports are also used to calculate your FICO score. FICO scores come from the Fair Isaac Corporation.
Individuals can also check their own credit. Everyone is eligible to receive a free credit report annually, as authorized by the federal government. You can order your free credit report at annualcreditreport.com. By annually reviewing your credit report, you can verify that all of your information is accurate and up to date.
There are two types of credit checks: hard inquiries and soft inquiries. Hard inquiries (also called “hard pulls”) are full credit checks, where companies or individuals look at all aspects of your credit. Typically, hard inquiries occur when you:
- Apply for a job
- Apply for a loan, such as auto loans and student loans
- Begin a new mobile phone contract
- Rent an apartment or buy a house
- Apply for a new credit card
It’s important to note that hard inquiries can remain on your credit report for up to two years and can negatively impact your credit score. Hard inquiries typically require your authorization to perform. If you are filling out an application, authorizing a credit check is probably part of the application process.
Soft inquiries (or “soft pulls”) also involve looking at your credit history. Unlike hard inquiries, they don’t require your permission, and they don’t impact your credit score. Credit card companies and insurance companies perform soft inquiries when they want to extend pre-approved offers to consumers. Some private lenders will show you potential loan interest rates by performing a soft credit check.
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Your current lenders or creditors may perform a soft inquiry as they do account reviews. Lenders spend a considerable amount of time looking at customer accounts, and if you’ve ever had your credit limit increased by a credit card company, that happened because of a soft credit inquiry. The main difference between soft credit checks and hard credit checks is whether a lender is required to get your permission.
Credit Check FAQs
Here are answers to some of the most common questions people have about the credit checks.
What does a credit check mean?
A credit check is simply a check of your credit by companies, lenders and individuals who need to examine your credit history. It’s a way for lenders to determine whether or not you are a lending risk. It’s also used to set interest rates on lending accounts. A credit check is a tool that companies can use to determine someone’s creditworthiness. By looking at your credit and lending accounts, they can decide whether you are someone who can keep up with their payments.
How does a credit check work?
Typically, a credit check could be performed any time you fill out an application, whether it’s for a job, a new loan, or a large purchase. By applying, you are giving the lenders, company, or individual permission to perform a credit check. If it’s a hard credit inquiry, your credit score may be affected negatively, but eventually will go back up. If it’s a soft credit inquiry, your credit score won’t be affected at all.
What shows up on a credit check?
Credit checks show pertinent information about you and your credit history. This includes personal information such as your name, address, Social Security number and date of birth.
All of your credit accounts will show up on your credit report. Your lenders share what types of accounts you have, opening dates, your loan amount or credit limit, account balances, and payment history. Public records, such as bankruptcies and civil judgments against you, will also show up during a credit check.
What do companies see on a credit check?
When companies perform credit checks, they are looking at your credit history. They want to get an accurate snapshot of who you are and your risk level if they lend you money or allow you to open a new credit account. First, companies see your personal information, including your name, address, Social Security number and date of birth.
Then, they will see all of your credit accounts. Accounts include credit cards and installment loans, like auto loans and mortgages. Listed under each account are your creditors’ names, current balances, payment history, and account status. If you’re behind on your payments, companies will see that. If you’ve ever gone through a bankruptcy or had a civil judgment against you, they will see that too.
What does a soft credit check show?
A soft credit check is performed when a lender or creditor wants to send consumers pre-approved offers. They also can occur when current lenders want to make sure you’re still eligible for your current credit limits and interest rates or if they want to raise your credit limit.
Soft credit checks show a basic overview of your credit. If you’ve ever checked your own credit report, it’s similar to what companies would see with a soft credit check. Soft credit checks do not affect your credit score.
What is a credit check for renting?
Credit checks are often performed when someone wants to rent an apartment or house. During the application screening process, you would give the rental company or individual permission to perform a hard credit check. When someone is renting you an apartment or home, they are looking at your credit for clues as to whether you would be a financially responsible tenant. They may look at your credit accounts to see if your current on all your payments.
What is a credit check for a job?
When seeking out employment, you may be subjected to a credit check by potential employers. As part of the applicant screening process, employers want to know who they may be hiring. Employment credit reports typically include personal information such as your name, address and Social Security number. In terms of your credit, employers can see any debts you’ve incurred, installment loan payments, such as car loans and mortgage loans, student loans, and more. They will see your payment history, as well.
Credit checks performed by employers aren’t allowed to show certain information. Restricted information includes your date of birth, for example. Individuals are protected by the Fair Credit Reporting Act, which sets the standards for employment screenings.
Credit plays a huge role in our lives, as well as the world around us. Credit checks are a valuable tool that we can use to see our own credit health, while allowing companies to make informed decisions about who they choose to do business with.