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Credit Checks Explained

By Nova

Introduction

When you’re pursuing a loan or other means of financing, you’ll have to go through a credit check. This raises a question – what is a credit check? Credit checks are a vital part of the process, so it’s something that most people will go through during their lives. You may have had some already and not even know it yet.

Learning more about credit checks is a valuable way to spend your time and improve your financial health. This short guide explains everything borrowers need to know about credit checks, from what they are to why they’re needed and what they show, and the different types available.

What Is A Credit Check?

So, what is a credit check?

Let’s start with what your credit history is. This is the information kept by credit bureaus, the three largest ones being Experian, Equifax, and TransUnion, that details your financial decision-making. This information is summarized into a handy report that can be read by interested parties. It doesn’t divulge any sensitive information, we have more detail on what is contained in credit reports below.

A credit check is where somebody petitions one of these bureaus to hand over the information. It is usually for research purposes by lenders or those who are considering offering you other financial opportunities. It is quite literally checking up on your credit history, to make sure that you’re responsible with your money. The main way to be responsible is to pay loan repayments and bills on time.

Having a poor credit history means that getting loans can be harder or you’ll have to contend with higher interest rates to guarantee you pay owed money back.

Why Are Credit Checks Required?

As we said, credit checks are necessary when you lend money or pay other bills. Let’s go into more detail about why credit checks are required for both you and the institutions that want access to this information.


Loaning Money

Many credit checks are executed by lenders and credit card providers to see if a potential borrower is trustworthy. Having a list of the past behaviors of the borrower is a great way to see how much they pay their debts, which can then be used to discern if they’ll pay this new debt they’re taking on. Credit checks are executed for loans, credit cards, and mortgages.

Paying By Installments

Credit checks may also be executed if you have other credit arrangements to pay for products in installments. Whether it’s a phone contract, a vehicle, or a piece of furniture, you can often arrange to pay a deposit and then pay the rest later. The suppliers will want to make sure that the buyer will make those payments, hence a credit check is required.

For Renting

When renting and trying to live in a landlord’s property, they have the right to get a credit check on you. This can tell them your likelihood to keep up rent payments, allowing them to avoid potentially problematic individuals before any paperwork is signed. They can often perform other checks too, like a criminal record check, to judge your suitability.

For Work In The Finance Sector

If you’re going for a job in the finance sector, you’d best know how to manage your money. That’s why many employers in this space will perform credit checks on job applicants to see what their financial situation is. They don’t want somebody with a poor credit score managing other people’s money, after all.

What Do Credit Checks Show?

Maybe you’re concerned about what information is contained within the average credit check. Those who access your credit history typically have specific information they’re looking for, and not everybody can gain access to this information, so your data should be in safe hands.

  • Your name and date of birth
  • Your address and previous addresses
  • Electoral register status
  • Any present overdraft
  • Accounts with outstanding credit
  • Public records such as declared bankruptcies or court appearances
  • Other financial connections to people like roommates or spouses, if you have joint accounts with them
  • Any identity fraud or financial crime convictions

Soft VS Hard Credit Checks
It’s important to note that there are two different types of credit checks – soft credit checks and hard credit checks.

Soft Credit Checks

Soft credit checks act as a snapshot of your financial behavior, highlighting much of the information detailed above. They also go by soft search or soft inquiry and they don’t have any negative effect on your credit score.

Soft credit checks don’t typically change how a lender makes their decision, it’s more common that you’ll run a soft credit check on yourself to see how your finances are looking. Since it doesn’t affect your credit history, it can be done as many times as you want.

Hard Credit Checks

A hard credit check, or a hard search, a hard inquiry, or a full credit check is where your entire credit report is pulled by a lender or a third-party institution. These leave a footprint on your credit report, so having too many on your record can lower your credit score and scare lenders away. Those footprints stay on the report for about 12 months, after which they disappear.

These previous credit checks can help lenders and others see how many loans you’ve tried to take out. If you’ve taken out multiple loans in the last year, it’s likely that you’re not great at managing money and so a new loan isn’t going to help you or the lender. Unlike soft credit checks, hard credit checks can and are used as the grounds for funding refusal. This allows lenders to avoid those who are abusing the lending system to stay afloat.

The key to avoiding hard credit checks is only lending when you absolutely need to. By doing this, you can borrow money without seeming desperate for credit, so lenders will still believe you can pay them back. Paying back your loans ASAP can sometimes clear loans within the year too if you can get a shorter-term repayment period.

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Nova Money (former Cash Coach)