In this article, we will learn about the concept of credit check, how it works, as well as its impact on credit scores and how to check your credit report.
Definition and Example of a Credit Check
A credit check is a process carried out by a lender, bank, or service provider when they need to verify your financial history. It allows them to access information about your current and past credit, your payment habits, and the types of loans you have, so they can assess your level of risk as a borrower.
How Does a Credit Check Work?
Three credit bureaus maintain reports on millions of borrowers, receiving regular updates about the status of your accounts from the companies that have lent you money. These updates are used by Fair Isaac Corp. (FICO) and VantageScore to calculate your credit scores, which are another critical indicator of your ability to obtain credit.
How Does a Hard Credit Check Affect Credit Scores?
A hard credit check occurs when you apply for a loan or credit. You may hear that hard credit checks can negatively impact credit scores, and this is somewhat true. You may be considered a higher risk if you apply for several new lines of credit in a short period. Credit scores may be slightly affected temporarily. How credit scores are impacted by a hard credit check depends on the type of loan that generates the inquiry.
How Does a Soft Credit Check Affect Credit Scores?
Soft inquiries occur when you check your credit report or when you give permission for a potential employer to access your report. These inquiries do not affect your credit scores, as you are not actively seeking new credit.
Soft Credit Check vs Hard Credit Check
A soft credit check does not affect your credit scores, while a hard credit check can negatively impact your credit scores. A soft credit check occurs when you check your credit report or when a credit provider wants to make a pre-approved credit card offer. A credit card company can perform a soft credit check without your knowledge or consent. You can opt out of receiving these unwanted credit card offers by calling 888-5-OPTOUT (888-567-8688) if you do not wish to receive them.
How to Check Your Credit Report
You should regularly check your credit reports from the three major credit bureaus to detect any discrepancies that may affect your ability to obtain a loan. These discrepancies may also indicate potential fraudulent activity. You have the right to obtain a free report from each credit bureau once a year. You can also get a free report if you have recently been denied a loan application.
You can request the reports through the individual credit bureau websites or at annualcreditreport.com, a site sponsored by the credit bureaus as a way to meet their requirements for providing free annual reports as mandated by the Fair Credit Reporting Act.
The Consumer Financial Protection Bureau recommends obtaining a report from a different credit bureau every four months so you can monitor your credit throughout the year.
If you see an error in one of your reports, you should contact both the credit bureau and the lender involved to request a correction. Remember that a hard credit check by an unknown lender might be a sign of fraud. Inform the credit bureau that you have reason to believe you may be or are about to become a victim of identity theft.
Each of your credit reports will have slight variations, so it is important to check all reports eventually. Lenders update account information at different times, and not all lenders report all activities to all three bureaus. The bureaus are actually competing companies that make a profit, so they do not regularly share their information with each other. There is one exception, which is fraud alerts. They are required to inform each other about these issues.
Source:
https://www.thebalancemoney.com/what-is-a-credit-check-4767514
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