When you’re looking to borrow money now or open up a credit card a credit check is something that the bank, service provider or lender will do when they want to look at your background and financial history. A credit check will give them information on your background, repayment history, and creditworthiness. These factors will help them assess how likely you are to pay back your credit.
If you want to take out a secured or unsecured loan then a lender is likely to run a credit check on your background. This means that they’ll look at your credit history and will review one or more of your credit reports kept on file by the big credit agencies. This report will give them an understanding of how you deal with credit and how much more you’re able to borrow and afford to pay back.
What is a Credit Check?
When you are looking to take on a large financial commitment like a loan, credit card, or mortgage, you will likely be subject to a credit check. This is because most lenders want to know how likely you are to repay the money they loan you, and they will ask to see your credit history to determine this.
One of the big three credit bureaus holds your credit history: Equifax, Experian, and Transunion. These bureaus compile a credit report for lenders to review, which gives them an overview of your borrowing history and helps them determine whether you are a reliable borrower. This report is essential in deciding whether or not to lend you money.
- A credit check looks at your credit history and credit score amongst other factors
- Lenders use credit checks to determine the creditworthiness of borrowers
- Doing a credit check may impact your credit score
How Does a Credit Check Work?
When a lender decides on whether to lend you money and at what interest rate they will typically review your credit history and credit report. Each report will offer a high-level summary of what debts you have outstanding and how frequently you make payments on each of them.
Alongside your credit history, lenders will typically also look at your credit score. Your credit score is a three-digit number that is determined by a statistical analysis of the contents in your credit report. The higher the credit score the less likely you are to default on a payment. Whenever you try to borrow money or set up a credit card the terms and conditions will outline whether a credit check will take place. When a lender runs this credit check a hard inquiry will appear on your credit history.
Depending on the terms and conditions certain lenders are also able to check your credit history at different points throughout your relationship with them. For example, your current lender might periodically check your credit history to make sure that there’s been no significant change to your circumstances. They want to check to make sure that nothing will impact your ability to pay back your loan.
Employers also might check your credit history but they would need to tell you this in any offer of employment. You are also able to check your own credit report by visiting the website of one of the three bureaus.
Checking your own credit score will have no impact on your credit rating.
What is The Impact of a Hard Inquiry on My Credit Score?
Any credit check that is triggered by an application is considered a hard inquiry. You might be aware that any credit check by a lender or credit card provider can cause a hard inquiry on your file – this is true to an extent. If you get multiple pre-approvals for credit cards in a short period of time you might be seen as high risk because these will be marked on your credit history.
Depending on what type of product you’re applying for your credit score will be impacted accordingly. If you’re applying for a product that typically involves comparing rates like a car loan, mortgage or student loan then FICO or AdvantageScore will treat all of these inquiries as one. This means that it looks like you’re only having a single inquiry on your credit score.
If on the other hand, you apply for multiple credit cards within a short period of time this can be seen as multiple inquiries and could lower your credit score.
Note vantage score consolidates all rate shopping for the last 14 days whereas Fico gives a much wider time frame of 45 days.
It’s worth noting that hard inquiries have much less of an impact on your credit score than late payments or delinquencies on any outstanding balances. FICO only looks at the last 18 months when determining your score and estimates that each inquiry will only take 5 points or less off your score.
Credit checks look at many different factors including credit history, credit score and credit utilization ratio.
How do soft inquiries affect my credit score?
A soft inquiry occurs when you look at your own credit report or give permission to an employer to look at your report. These do not affect your credit score. This is because you’re not actively seeking to borrow more money or extend a line of credit. Soft inquiries also happen when a lender wants to give you pre-approved credit which could be a credit card or other financial product. When this happens the credit card company could make a soft inquiry without you even knowing about it. If you don’t want to receive these unsolicited offers you can call them and let them know.