When a lender, bank, or service provider needs to check your financial history, they run a credit check. It gives it access to information about your current and previous credit, payment habits, and loan types so it can assess your risk level as a borrower. When a lender, bank, or service provider needs to check your financial history, they run a credit check. It gives it access to information about your current and previous credit, payment habits, and loan types so it can assess your risk level as a borrower. If you apply for a loan, a potential lender will almost certainly run a credit check on you. It will examine your credit history by reviewing one or more of the three major credit bureaus' credit reports. The reports show how you manage credit and how much room you have to take on new debt.
Credit Check Definition and Example
When you apply for a major financial commitment like a loan, credit card, lease, or utility service, you'll give the lender permission to check your credit somewhere in the application. This enables it to obtain a credit report from one of the three major credit bureaus, Experian, Equifax, or TransUnion. It wants to know that you'll be able to make your payments. The report provides information about your borrowing history. A credit inquiry is another name for the same thing.What is a Credit Check, and How Does It Work?
The three credit bureaus keep track of millions of borrowers, and they get regular updates on the status of your accounts from lenders who have already given you money. Once a month, these updates are usually made. Fair Isaac Corp. (FICO) and VantageScore use the reports to calculate your credit score, which is another important indicator of your creditworthiness. When a lender, landlord, or another institution conducts a credit check, they will receive a copy of your credit report from the credit bureau. They'll examine it to determine your credit score, whether you make timely payments, and how well you can manage additional debt. This will determine whether or not you are eligible for a loan and how much you can borrow. Important: When determining whether you can comfortably afford to take on more debt, lenders consider factors such as your debt-to-income ratio (your monthly debt payments as a percentage of your monthly income).What Impact Do Hard Inquiries Have on Your Credit Score?
A "hard inquiry" is a credit check triggered by an application for a loan or credit. You may have heard that hard inquiries lower your credit score, which is partially true. If you apply for several new credit lines in a short period of time, you may be perceived as a higher risk. It's possible that your score will take a temporary hit. The impact of a hard inquiry on your credit depends on the type of loan that generated the inquiry. If the loan is one that typically involves rate shopping, such as a student loan, auto loan, or mortgage, FICO and VantageScore treat all inquiries as a single inquiry. They'll think you're just looking for the best deal. If you apply for several credit cards in a short period of time, the hard inquiries will be considered separately. You're not looking for the best lender in the world. Please keep in mind that FICO will combine all rate-shopping hard inquiries that fall within a 45-day window. VantageScore employs a shorter period of 14 days. Hard inquiries have a much lower impact on your credit score than other factors like loan payment timeliness and total debt burden. When calculating your score, FICO considers only hard inquiries from the previous 12 months. It specifies that each difficult question should deduct no more than five points from your final grade.What Impact Do Soft Inquiries Have On Your Credit Score?
When you check your own credit report or give a prospective employer permission to do so, you are making a soft inquiry. Because you aren't actively seeking new credit, these have no impact on your credit score. A soft inquiry may be made when a lender wants to make you a pre-approved credit card offer. The credit card company may conduct a soft inquiry without your knowledge or permission. If you don't want to receive these unsolicited credit card offers, you can opt-out by calling 888-5-OPTOUT (888-567-8688).Credit Checks (Soft) vs. Credit Checks (Hard)
Credit Check (Soft) Credit Checks (Hard) There will be no impact on your credit score. It can be detrimental to your credit score When employers or credit cards run pre-approval checks on you, this happens. This happens when you apply for credit with a new lender or service provider. It can also happen when you check your own credit report. It has a one-year impact on your credit score, but it stays on your credit report for two years. It isn't recorded on your credit report. Multiple loan inquiries in a short time only count as one hard check.How to Get a Copy of Your Credit Report
You should check your credit reports from each of the three major credit bureaus regularly for any discrepancies that could affect your ability to obtain a loan. They could also be a sign of possible fraudulent behavior. Once every 12 months, you are entitled to a free credit report from each of the three credit bureaus. You can get a free report if you've recently been denied a loan application. You can order the reports directly from the bureaus' websites or through annualcreditreport.com, a site sponsored by the bureaus to fulfill their obligation under the Fair Credit Reporting Act to provide free annual reports. To keep track of your credit throughout the year, the Consumer Financial Protection Bureau recommends getting a report from each credit bureau every four months. If you notice an error in one of your reports, contact both the bureau and the lender in question. Make a correction request. Remember that a hard inquiry from an unknown lender could indicate fraud. Notify the bureau if you have reason to believe you've been a victim of identity theft or are about to be. Because each of your credit reports will differ slightly, it's critical to review all of them at some point. Account information is updated at different times by lenders, and not all of them report every transaction to all three credit bureaus. Because the bureaus are for-profit businesses, they don't share information with one another regularly. Fraud alerts are an exception. They are required to keep each other informed about these issues.Important Points to Remember
- Lenders, credit card companies, and other service providers conduct credit checks to ensure that you will be able to meet your ongoing financial obligations if they do business with you.
- When you apply for new credit, you will be subjected to a hard credit check. Soft checks, on the other hand, will not harm your credit score.
- Soft credit checks occur when you check your credit score, a credit card company runs a check for a pre-approval offer, or when you give a potential employer access to your report.
- By law, you are entitled to a free credit report from each of the three credit bureaus once a year.
