The Reasons they Check Your Credit
A credit check is required if a lender, bank, or service provider wants to check your financial history.
If you’re asking for a loan, your prospective lender will almost certainly do a credit check, which means they’ll examine your credit history by evaluating one or more of the three major credit agencies’ credit reports. The reports show how you manage credit and how much room you have for expansion.
Credit checks are conducted by lenders, landlords, and employers to assess an individual’s financial history and creditworthiness. These checks help decision-makers make informed choices about lending money, renting property or hiring candidates for roles that involve financial management. Credit checks provide insight into an individual’s financial behavior and level of responsibility.
Process of credit checking
Each of the three credit bureaus keeps track of millions of borrowers. Receiving data from the companies that have already loaned to you on a monthly basis.
When a lender, landlord, or other institution performs a credit inquiry. The credit bureau sends them a copy of your credit report. They will examine it to determine not only your credit score but also whether you make timely payments and how well you can manage further debt.
Important: Lenders look at factors such as your debt-to-income ratio, which measures your monthly debt payments as a percentage of your monthly income, to determine whether you can comfortably take on more debt.
Credit Inquiries: How They Affect Your Score
1. Whenever you apply for a loan, a hard inquiry is conducted. You may have heard that hard queries can lower your credit score, and this is somewhat accurate. If you apply for many new credit lines in a short period of time, you may be perceived as a bigger risk. And your credit score may suffer a temporary drop.
2.Your credit score will be affected by a hard inquiry based on the type of loan that generated the inquiry. FICO will treat all inquiries for the same type of loan as one inquiry.
3.If you apply for multiple credit cards in a short period of time, these hard inquiries will be treated differently because you don’t seek out one lender.
4.The impact of hard inquiries on your background check, your credit score will be much smaller than that of other factors. Because in determining your score, FICO takes into account only hard inquiries from the prior 12 months. And each hard inquiry should take less than five points away from your score.
Note: FICO will combine rate-shopping hard inquiries received within 45 days.
The impact of soft inquiries on your credit score
1.When you examine your own credit record or grant a prospective employer permission to do so, this is referred to as a soft inquiry. Because you are not actively pursuing new credit, these have no impact on your credit score.
2.A soft inquiry can also occur when a lender wants to make you a preapproved credit card offer. Without your awareness or approval, the credit card company may do a soft inquiry.
3. Soft inquiries are different from hard inquiries, which can negatively impact an individual’s credit score. Hard inquiries occur when a lender or financial institution checks an individual’s credit as part of a loan or credit application. And can cause a temporary decrease in the credit score.
4. Soft inquiries have no impact on the credit score because they do not reflect a credit application or potential increase in credit usage. Instead, they are simply a way for lenders or individuals to obtain information about creditworthiness.
The Best Way to Check Your Credit Report
- You should review your credit reports from each of the three major credit agencies on a regular basis to look for inconsistencies that could damage your ability to obtain credit or suggest potentially fraudulent activities. In addition, you are entitled to receive a free report from each of the agencies once a year.
2.You should contact the bureau and the lender in question if you see an error in the report. Keep in mind that a hard inquiry from an unfamiliar lender may be a sign of fraud. Inform the bureau if you believe you are the victim of identity theft.
3.It is important to check all of your credit reports eventually since each one will be slightly different
Note: You should get a credit report from each of the three credit bureaus every four months to keep an eye on your credit throughout the year.
Summarize Everything We Learned Above
To ensure that you will be able to meet your ongoing financial obligations, lenders, credit card companies. And other service providers perform credit checks. You are entitled to examine your credit report with each of the three credit bureaus once a year by law. When you apply for new credit, a hard credit check occurs, whereas soft credit checks occur when you check your own score, a credit card company does a preapproval, or your employer accesses your report.
