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How Does a Credit Check Work: Definition, Factors, & Improving It

By June 22, 2022June 24th, 2022No Comments
How Does a Credit Check Work: Definition, Factors, & Improving It

How Does a Credit Check Work?

Credit Check Work with a bank, lender, or service provider who will conduct the credit check when it’s needed to verify your financial background. It provides details about your current and past credit payments, your payment habits, and the kind of loans you’ve had so that it can determine the risk you face as the borrower.

A potential lender will likely conduct a credit report on you if you’re trying to get a loan. They will examine your credit background by looking through any or all the credit reports provided through the major credit bureaus. These reports show how you manage credit and the amount of room you can make.

How does a Credit Check work?

The three credit bureaus have reported on millions of borrowers. They get updates about your account from companies that’ve loaned funds to you. These reports are used for Fair Isaac Corp. (FICO) and VantageScore.

You’ll receive a copy of the credit file at the credit bureau whenever a lender, landlord, or another institution conducts a credit inquiry. They’ll look it over to assess not just your credit score but also whether you can pay on time and how you’re able to handle taking out loans. It will help determine if you are eligible for a loan and the much you can take out.

Why Might a Credit Check Be Needed?

Lenders may see from your credit history whether you’ve been responsible for borrowing money in the past. To get a loan, a credit check is required. Utilities, for example, might use them to determine your propensity to pay your bills on time.

How Hard Inquiries Affect Your Credit Score?

A credit check triggered through an application for credit or credit is referred to as a ” hard inquiry.” You’ve likely been told that inquiries from a hard source could affect the credit rating. You may be considered riskier if you make multiple applications for new credit lines in a short duration. Your score could be affected for a short time. How a hard inquiry impacts your score depends on the loan source.

FICO and VantageScore take all inquiries for the same kind of loan. They’ll think you’re trying to find the best rate. Hard questions should be treated separately if you apply for more than one credit card within a short time.

They have less influence on credit score than other elements, such as the speed of your loan repayments and the total amount of debt you carry. FICO considers hard inquiries only from the previous 12 months when making your score. Every tricky question should be less than five points off your score.

How Soft Inquiries Affect Your Credit Score?

Soft inquires occur when you review yourself on your credit report or consent to a potential employer to check your credit report. They won’t impact your credit score because they aren’t actively looking for credit.

Soft inquiries may also happen when a creditor is looking to provide you with an approved credit deal. The credit company could conduct soft examinations without consent or knowledge.

How Can I Know What Lenders See When They Do a Credit Check?

The following information will be visible to them:

  • Your private identifying information;
  • Your credit history and pattern of repayment;
  • And recent applications you’ve made.

How to Check Your Credit Report?

You should regularly review your credit reports from the major bureaus to identify discrepancies that could impact your eligibility to obtain loans. Every twelve months, you’re entitled to a complimentary report from all credit bureaus. Getting the information for free is also possible if you’ve been rejected.

Make contact with both bureaus and the lender concerned if you find an error in any of the reports you have received. Request a correction. Be aware that a hard inquiry from an unidentified lender could indicate fraud. Inform the bureau that you suspect you’ve been or are near to becoming victimized by identity theft.

Your credit reports may differ slightly. It’s crucial to review them in the end. Creditors update information about their accounts at various time frames but not every company reports each transaction to the three bureaus. They are two competing companies for profit; therefore they do not regularly communicate with one another about information. The only exception is the fraud alerts. They are required to notify one another of any issues.

Why Would a Potential Employer Look at Your Credit?

The credit report may be used for security reasons to check someone’s identification, history, and education, to avoid theft or embezzlement, and to see the applicant’s prior employers (especially if there is missing employment experience on a resume).

Does an Employer Credit Check Hurt Your Credit Score?

A prospective employer looking into your credit history won’t impact your score in the major credit bureaus.

Luke Pitt