What is a credit check

Lenders, banks, credit card providers, and other financial institutions always perform a credit check to review an individual’s financial history before extending a new line of credit. A prospective lender will almost always run a credit check on your credit history by reviewing one of your credit reports generated by major credit reporting bureaus. These reports provide clear data to the lenders about how you handle credit and how much space you have to take on more.

In this article, we take a look at everything there is to know about credit checks and more.

A credit check or a credit inquiry gives a lender to your credit report and history in order to better understand how you manage your finances. Depending on the reason behind the credit check, the lender may conduct a hard credit check or a soft credit check. Both of these types of checks show different amounts of information and each has a different effect on your credit score.

Lenders can pull credit reports from one or all three major credit reporting bureaus including Experian, Equifax, and Illion. Each credit bureau follows its own scoring model and may have a different credit score for you. So the result of the credit bureau checks can also differ.

Credit reporting agencies collect information from several lenders and companies around the country. Then they use this information to create detailed credit reports and calculate credit scores of individuals.

When a lender, bank, company, or even your landlord does credit checking against you, they receive a copy of your credit report from the credit bureau to assess your creditworthiness. This in turn helps institutions evaluate your eligibility for a new line of credit.

Note that not all lenders report to all credit bureaus and because of this your credit report information and even your credit score can be different, depending on the bureau. For instance, your Experian credit report may be different from your Equifax credit report.

When lenders or companies conduct a credit check, they review your credit report sent by credit reporting bureaus. The information shown to the lender depends on whether they are conducting a hard credit inquiry or soft credit inquiry.

While a soft credit inquiry only shows limited information from your credit report, enough to verify your information, a hard credit inquiry gives a more broader overview of your financial history. A creditor check also shows your credit score, which is the number that indicates your credit worthiness.

Though, it's important to note that no matter what kind of credit record check a lender runs, they won’t be able to see how much you earn or view your bank statements.

A number of third parties can run credit checks on you but they all need to have valid reasons for running the check.

When you apply for a new line of credit, whether it is to get a new loan, credit card, mortgage, or car finance, a credit check will be performed. Banks can also conduct credit checks when you decide to open a new account with them.

Here are some of the many organizations that can run credit checks on you:

• Credit card providers
• Loan providers
• Insurance providers
• Utility companies like gas, electricity, and water
• Mobile phone companies
• Employers
• Landlords

While some of the above can perform both hard and soft credit checks, others can only perform soft credit checks. Note that there are also no credit check loans available that extend a new line of credit without any kind of credit check.

A soft credit check is conducted to get a basic idea about your credit history. It only shows limited information about you and it is used as a general background check to confirm your identity.

More importantly, soft credit checks are not marked on your credit report and they do not impact your credit score in any way

When an organisation runs a soft credit inquiry on your credit file, they can see your:

• Name
• Date of birth
• Previous and current address
• An overview of your credit history

There are many situations where a soft credit check can be conducted, including:

• When you check your own credit report
• When a company reviews your credit report for verification purposes
• When you take a new insurance policy
• When you are renting a new property
• When a bank or lender checks your credit report for pre-approval offers

A hard credit check gives a complete and detailed view of your entire credit history. Also known as a hard credit inquiry, it shows lenders how you have handled credit and repayments in the past.

Lenders conduct hard checks to understand the level of risk you present as a borrower. They assess how likely you are to repay back the loan or credit in case they approve your credit application. Hard credit checks also help lenders determine the terms of agreement like interest rate, repayment period, and whether the new line of credit requires a security deposit or collateral for assurance.

As opposed to a soft credit check, a hard credit check will leave a mark on your credit report.

So, how long do inquiries stay on your credit report? Hard inquiries can stay on your credit file for up to five years. They will also be visible to any lenders who view your credit reports.

There are many situations where a hard credit check can be conducted, including:

• When you apply for a new line of credit
• When you refinance a mortgage or car loan
• When you sign up with a utility provider
• When you get a new mobile phone contract

Since hard credit inquiries stay on your credit report for many years, too many hard inquiries in a short span of time can affect your credit score and your ability to get a new line of credit.

When lenders see multiple hard inquiries made recently, it shows that you have been in the market for credit and have been unsuccessful so far.

It's important to note that while every application for a new line of credit creates a hard credit check, whether the application was approved or rejected isn’t marked on the credit report. The lenders can only see that you applied for new credit but they cannot see whether you got it or not.

While there are many factors that can majorly impact your credit score and hard inquiry only has a small impact on your score, it can still impact your score to some extent. Hard credit checks are marked on your credit score and too many hard inquiries in a short span of time can decrease your credit score. To put it simply, credit checks can affect credit scores, but only in some cases.

Soft credit checks do not get marked on your credit report and they do not affect your credit score in any way. For instance when you check your own credit report or when a lender reviews your credit history to provide you with a pre-approved home loan offer, it is considered a soft inquiry and it doesn’t affect your credit score.

Credit checks are crucial not just to review your own credit history but also to get approved for a new line of credit. Since hard credit checks can affect your credit score, you should only apply for more credit if you really need it. You should also keep checking your credit report regularly to ensure there isn’t any hard check that was conducted without your consent. In case you do find a discrepancy, you can dispute errors in your credit report.

With ClearScore, you can get free credit reports and check credit score in just a few clicks. Take a look.