So, What Exactly Is A Credit Check?
You probably must have heard the phrase “Credit Check” a couple of times without giving much attention to it. Every American who has some level of financial dealings will, at one point or another, have to use a credit check or, rather, have a credit check done on them.
A credit check is the information that credit reference agencies gather on you. The major players are Equifax, Experian, and TransUnion. They use this information to prepare a credit report about your personal financial affairs, including your credit history. It is more like a background check on your finances to get insight into your financial behavior, which is then compiled in a report. Lenders and organizations alike, use credit checks to know if you have a responsible financial record and if you’re worth borrowing money.
What Do I Need A Credit Check For?
If you have previously borrowed money from any lender or you intend to borrow in the future, then you need to understand how credit checks work. Did you know that every lender will most likely carry out a credit check to see if you’re creditworthy before borrowing money? Even future employers conduct credit checks on employees before hiring them, especially if the role is related to money management. In fact, in a survey carried out by CareerBuilder, it was discovered that 29% of companies interviewed included a credit check as part of their recruitment process. Some landlords, utility companies, and financial organizations would preferably have a credit check done on you to ascertain whether you will be faithful to your repayment or would be a liability to the business. So, poor knowledge of the subject could adversely affect you in the future. Now that you understand what credit is, let’s dig further into some essential info.
Important Facts About Credit Checks
We will be discussing the following subsequently:
- What Kind of Information Is In A Credit Check?
- Types Of Credit Checks
- Why You May Need A Credit Check
- How A Credit Check Affects You
- Is My Permission Needed Before A Credit Check Is Carried Out On Me?
- What You Should Avoid
What Kind of Information Is In A Credit Check?
The information included in a credit check is usually determined by what the requesting organization wants to learn about you (your finances).
Also, depending on the type of credit check the company is running on you, a typical credit report will contain the following information:
- Your name and date of birth
- Your address and address history
- Your current account status
- Your credit status where you’ve already taken out loans: this includes credit cards, student loans, mortgages, and utility payments.
- Fraud records
- Joint mortgage accounts
- Public records, including bankruptcy claims
- Identify verification
- Previous credit history and how well you performed on the repayments
- Footprints of previous credit checks.
Types Of Credit Checks
There are two types of credit checks – soft credit checks or soft inquiry and hard credit checks or hard inquiry.
A soft credit check is also known as a soft inquiry, a soft search, a quotation search, and a soft pull. It’s primarily intended to provide the lender with brief and concise information about you. A soft credit check will not affect your ability to get a loan from the company, as they’re prevented by law from using it in determining your eligibility for a loan. However, it gives them an insight into the capability to relay on time. Usually, people who have poor credit checks have lesser chances of getting a loan, and even when they do; it’s at a higher interest because they’re regarded as high-risk customers. You can personally request for a soft credit report to know your credit score with the credit bureau. This is the type of credit check that employers run on their prospective employers. If they eventually use their findings in deciding who to employ, they’re required by law to inform the candidates.
A hard credit check, also known as a hard pull, a hard search, hard inquiry, or a full credit check, is a more comprehensive report. It could affect your ability to get a loan. The lender looks at your file thoroughly, and if your past finances haven’t been straight, you’re less likely to be accepted for a credit. When this kind of check is conducted, a footprint of the check is left in your report. This footprint remains for up to a year in your report.
It’s important to avoid having multiple footprints within a short time, as this will affect your credit score and could make you seem desperate.
Why You May Need A Credit Check
- For Loans
When you need to get a loan, mortgage, or a credit card, lenders, including banks, credit companies, and utility suppliers will want to know your financial standing to determine your worthiness for a facility.
- For Employment
These days, education and experience are graduating becoming more and more insufficient to get a good job. Many employers run background checks, including credit checks. However, they’ll only see a soft credit and not your full report.
- For Important Business Deals
When it comes to making installment payments for purchases, some companies will not let you leave with the product without ascertaining your financial worthiness.
- For Renting
Some landlords and rental agencies may not accept you if your credit score is weak. For example, if you have missed or skipped payments in the past, it could adversely affect your chances of getting an apartment or office space.
How A Credit Check Affects You
All right, you pretty much understand a lot about credit checks now. It’s important to note that whenever any credit check is run in you, you are given a score (usually between 0-99).
This score is a measure of your financial behavior or trustworthiness in the eyes of lenders and businesses. The score may vary depending on which credit reference agency compiled it. With a high score, your chances of securing future loans are higher. That’s essentially how credit checks work.
Is My Permission Needed Before A Credit Check Is Carried Out On Me?
Yes, your permission is needed for a credit check to be conducted on you. The credit reference agencies are mandated by law to notify the applicant before proceeding. Besides, a credit check is only run on you when you apply for s credit. Even employers are required to inform the candidates before getting their credit report.
What You Should Avoid
To prevent racking up adverse reports, it’s recommended that you only borrow once in a quarter, and only seek for loans that you can comfortably repay. For job seekers, you’d be better off applying to companies that would Less likely request for a credit check on you, especially if you’re not proud of your past financial behavior.
If you’ve been defaulting on your rent or utility payments, now would be a good time to adjust because the records could speak against you tomorrow.
Bottom Line
Credit checks reveal your past financial behavior and tell a credit provider if you are worthy of financial trust. It also affects the quality of the loans you get. Understanding how credit checks work would do you a big favor – starting with developing healthy financial behavior.