What You Need to Know about Credit Checks

by Susan Paige
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When it comes to understanding what a credit check is, it helps to know what makes up your credit file. Your credit file is the information that credit reference agencies gather on you. This is information that is then used to make up a credit report. A credit check is examining someone else’s credit history. It will provide insight into your financial behavior in a report that is easy to understand. A credit check lets a lender know if you have used credit responsibly in the past so it can give them an idea if you are likely to pay back the money you borrow. These checks aren’t just used when you are applying for new credit or want to borrow money and can be used for other reasons. For example, a utility company may also do a credit check to see if you are likely to pay your bill on time.

When Is a Credit Check Needed?

There are many different instances when someone may perform a credit check on you. Here are a few examples of people or entities that may perform a credit check:

  • Lenders: If you apply for a loan, mortgage, or credit card then the lender needs to know how financially trustworthy you are before they are able to lend to you. Your credit rating will let them know whether it’s a good idea to say yes and if they are likely to get their money back. If you are eligible for a loan then the credit check can also help determine the amount of interest you pay since it varies depending on how good your credit rating is. You will be more likely to get a lower interest rate if you have good credit.
  • Other Credit Arrangements: Any time you are setting up a payment plan for something you are not paying in full, there will be a credit check. This can be for a car, furniture, or even a mobile phone contract. Just like the lender, the company needs to be confident that you are going to be able to keep up with your payments.
  • Landlords: A landlord may perform a check to see if you are suitable to rent the property. If you have a history of late or missed payments then the landlord may not want to rent to you.
  • Employers: Some employers will do a credit check, especially if your job is in financial services.

Hard Inquiry vs. Soft Inquiry

A credit check can take on two different forms. A hard inquiry is usually done by a financial institution, such as a credit card issuer or lender. These will also take place when you apply for a loan or mortgage and you usually have to authorize these checks. It is possible for a hard inquiry to lower your score by a few points, but for some, it can only have a small effect on your score. A single hard inquiry may not play a big role in whether or not you are approved. While a hard inquiry isn’t that bad, you still want to think twice about applying for a lot of credit at the same time, or within a few months. Multiple inquiries in a short time frame could let credit card issuers and lenders know you need credit and you could be a high-risk customer. Common hard inquiries are for auto loans, student loans, personal loans, apartment rentals, and mortgage applications.

A soft inquiry happens when a person is checking your credit as part of a background check. Your employer may perform this before hiring you or a credit card issuer can check your credit to see if you qualify for any additional credit card offers they want to give you. Soft inquiries won’t affect your credit score. They may not even be reported to the credit bureau. Soft credit inquiries are common for prequalified insurance quotes or credit card offers and employment verification.

There are some credit checks that could show up as either. For example, cell phone providers, cable companies, and Internet providers can check your credit. If you aren’t sure how an inquiry is classified, ask the financial institution or company involved to clarify whether or not they are using a soft or hard inquiry. It’s best to check your credit reports often so you can look for any errors, such as a hard inquiry happening without your permission. You are only able to dispute any hard inquiries that happened without your permission. If you did authorize a hard inquiry for an application then it will usually take about two years to get off your credit report.

What Shows Up on a Credit Check?

There are a few things that show up when someone does a credit check, including:

  • Personal Information: This can include your name, birth date, address, phone number, and Social Security Number.
  • Employer History: This can also be included in the information section. This is listed on the report in order to verify your identity.
  • Account Information: This includes specific details about your accounts, including payment history, credit utilization, current account balance, closed accounts, open accounts, and the dates when accounts were closed or opened.
  • Consumer Statements: This section will have any brief statements that you have submitted to the credit bureaus. For example, if you have disputed an item then the statement may explain this.
  • Public Records: Public records can include tax liens, civil judgments, bankruptcies, and foreclosures. All of these things can hurt your credit.
  • Inquiries: Hard inquiries will affect your credit and an inquiry you didn’t authorize can mean someone has applied for credit in your name.

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