Understanding Credit Checks

Credit checks are conducted by lenders, credit card companies, and other service providers to ensure that you are capable of meeting your financial obligations. Hard credit checks are performed when you apply for new credit, potentially impacting your credit score. Soft credit checks, on the other hand, do not affect your score and occur when you check your own credit or when a credit card company does a pre-approval check.

What is a Credit Check?

When you apply for a loan, credit card, lease, or utility service, you grant the lender permission to check your credit by pulling a report from Experian, Equifax, or TransUnion. This report provides the lender with insights into your borrowing history and helps them evaluate your creditworthiness.

How Credit Checks Work

The three major credit bureaus maintain reports on millions of borrowers, updating them monthly with information about your accounts. Lenders use these reports, along with credit scores from FICO and VantageScore, to determine your eligibility for a loan. Factors like debt-to-income ratio also play a role in the decision-making process.

Impact of Credit Inquiries

Hard inquiries from loan or credit applications can slightly lower your credit score temporarily, especially if you make multiple inquiries in a short period. FICO and VantageScore treat inquiries differently based on the type of loan, with rate-shopping for certain loans being viewed more leniently.

Soft Inquiries and Your Credit Score

Soft inquiries, such as checking your own credit report or pre-approved credit card offers, do not affect your credit score. These checks are made when you're not actively seeking new credit and typically have no impact on your borrowing ability.

Checking Your Credit Report

It's important to monitor your credit reports regularly for errors or signs of potential fraud. You are entitled to a free report from each of the credit bureaus once a year, which can be requested through their websites or annualcreditreport.com. Monitoring your credit throughout the year and reporting any discrepancies can help safeguard your financial well-being.