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What Is a Credit Check? [1]
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Date: 2022-12
A lender, bank, or service provider performs a credit check when it needs to check your financial history. It grants access to information about your existing and past credit, payment habits, and the types of loans you have so it can assess your risk level as a borrower.
A prospective lender is likely to run a credit check on you if you're applying for a loan. It will look at your credit history by reviewing one or more of your credit reports maintained by the three major credit bureaus. The reports provide an indicator of how you handle credit and how much room you have to take on more.
Definition and Example of a Credit Check
You'll grant the lender permission to check your credit somewhere in the application when you apply for a significant financial commitment such as a loan, credit card, lease, or utility service. This allows it to pull a credit report from Experian, Equifax, or TransUnion, the three major credit bureaus. It wants to be reasonably certain that you'll make your payments. The report gives insight into your history as a borrower.
Alternate name: Credit inquiry
How a Credit Check Works
The three credit bureaus maintain reports on millions of borrowers, They receive regular updates on the status of your accounts from companies that have already loaned money to you. These updates are usually made once a month. The reports are used by the Fair Isaac Corp. (FICO) and by VantageScore to calculate your credit score, another critical indicator of your creditworthiness.
They'll receive a copy of your credit report from the credit bureau when a lender, landlord, or other institution makes a credit inquiry. They'll review it to evaluate not only your credit score but also whether you make payments on time and how well you can handle borrowing more money. That will determine whether you qualify for a loan and how much money you can borrow.
Note Lenders also look at factors such as your debt-to-income ratio (your monthly debt payments as a percentage of your monthly income) to determine whether you can comfortably afford to take on more debt.
How Hard Inquiries Affect Your Credit Score
A credit check triggered by an application for a loan or credit is called a "hard inquiry." You may have heard that hard inquiries can ding your credit score, and that’s true to an extent. You may be seen as a higher risk if you apply for multiple new credit lines in a short period of time. Your score may take a slight hit temporarily. How your score is affected by a hard inquiry depends on the type of loan that's generating the inquiry.
FICO and VantageScore treat all inquiries for the same type of loan as a single inquiry if it’s the kind that typically involves rate shopping, such as a student loan, an auto loan, or a mortgage. They'll assume you were just looking for the best rate. But the hard inquiries will be considered separately if you apply for multiple credit cards in a short period of time. You're not looking for the single best lender.
Note FICO will consolidate all rate-shopping hard inquiries if they fall within a 45-day window. VantageScore uses a smaller time period, just 14 days.
Hard inquiries have a much smaller impact on your credit score than other factors, such as the timeliness of your loan payments and your total debt burden. FICO considers hard inquiries from only the prior 12 months when determining your score. It says that each hard inquiry should take less than five points off your score.
How Soft Inquiries Affect Your Credit Score
Soft inquiries occur when you check your own credit report or when you give a prospective employer permission to do so. These don't affect your credit score, because you're not actively seeking new credit.
A soft inquiry can also occur when a lender wants to give you a pre-approved credit card offer. The credit card company may make a soft inquiry without your knowledge or permission. You can opt out of these unsolicited credit card offers by calling 888-5-OPTOUT (888-567-8688) if you don't want to receive them.
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[1] Url:
https://www.thebalance.com/what-is-a-credit-check-4767514
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