Credit Checks

How Credit Checks Work

When applying for credit, lenders can inquire for a copy of an individual’s credit report from one of the major credit bureaus. These inquiries or credit checks can be listed on a credit report. While these inquiries may cause a credit score to drop, it will not change drastically. Sometimes, looking for a new credit line can mean a higher risk, but most credit scores do not get affected by multiple inquiries from mortgage, auto, or student loan lenders.

A credit check can be useful to determine an individual’s credit score, which many businesses, employers, creditors, and insurers use. The best way to go about doing a credit check is by getting a credit report. This provides information on an individual's location, how the individual pays bills, record of lawsuits and arrests, and any history of bankruptcy. The credit report contains three different reports from the three major credit bureaus.

A credit check can come in two forms. There is the soft pull which is just a basic credit check to determine a credit score. It is only use for informational purposes in order to find out a score. There is also a hard pull credit check, which results in more complicated reports. Lenders will often use hard pull credit checks for new accounts. These are the credit checks that can affect credit score.

The impression from applying for credit and having a credit check done will vary on a person to person basis based on their unique credit histories. For most people, one additional credit inquiry takes less than five points off. However, inquiries can show a greater impact with less accounts or a shorter credit history.

Large amounts inquiries also imply greater risk. An individual with at least six inquiries on their credit reports statically can be up to eight times more likely to declare bankruptcy in comparison to people with no inquiries. While inquiries can help assess risk, they play a minor part in doing so. How an individual pays bills and his overall debt burden as shown on your credit report is much more influential.

Performing a credit check through a credit report can help improve the chances of getting a job or a loan. Credit reports can show an individual what their credit score is and how it can be improved as opposed to jut a number.

Under the Fair Credit Reporting Act along with the Fair & Accurate Credit Transactions Act, everyone is entitled to free credit report annually from the major credit bureaus. This law was created in order to provide individuals with a free copy annually of their credit report upon request, making them more aware of their financial position. Free credit reports can be obtained by providing a name, date of birth, address, and social security number.