Credit score Q&A: “What is a credit check?”
These days, it’s pretty common to hear the phrase “credit check,” or for that matter, “no credit check.”
Heck, if you drive down the street you’ll probably pass a business that mentions something about a credit check.
If you happen to go by a car dealership, you should notice advertising banners that end with “O.A.C.”
This common acronym stands for “on approved credit,” meaning you may be eligible for their unbelievable lease deal if you have the necessary credit score.
Credit Checks Allows Creditors to Assess Creditworthiness
And the only way to find out is by performing a credit check. A credit check is exactly how it sounds. A potential creditor will check your credit history before extending a loan to you.
They do so to ensure you are a sound borrower. After all, they can’t just take your word for it, and if you walk in off the street, how else can they trust you?
Put simply, they can’t. So a credit check is the quickest and easiest way to determine your creditworthiness.
When a creditor “checks your credit,” it typically means that they are pulling both a credit report and a credit score from one or all of the three major credit reporting agencies.
All they need to perform a credit check is basic information like your name and address, social security number, and your consent. Once they’ve got that, they can view your credit report and credit scores.
From there, they’ll quickly be able to assess if you are a good candidate for the loan in question, whether it’s a credit card, auto loan, cell phone, mortgage, etc.
They may just rely on your credit score, assuming they have a certain scoring threshold or minimum. Or they may dig deeper and take a hard look at your credit report, regardless of your otherwise excellent credit score.
Regardless, they’ll have a ton of information to judge you on, and this credit check will be instrumental in the loan approval process.
*Keep in mind that landlords may also perform a credit check to determine if you are a suitable tenant.
If you’ve missed rental payments in the past, it could come back to haunt you when looking for future apartments to rent.
There Are Two Main Types of Credit Checks
It’s also important to note that there are two main types of credit checks.
There are those that are performed by you (or those performed without your consent) that do not count against you. The latter being pre-approved offers and such.
These are considered “soft inquiries,” meaning they will not affect your credit score in any way.
In short, they won’t hurt you because you’re not applying for new credit. So you can perform a credit check on yourself without worry.
Free credit score providers are the most common example of a soft inquiry. These will not be visible to creditors when they perform credit checks, though you will be able to see them.
Then there are credit checks performed by potential creditors, with your consent. These are known as “hard inquiries,” and do count against you and your credit score.
They count against you because data has determined that there is a positive correlation between new credit and default risk.
Essentially, consumers who are requesting new credit are at a greater risk of defaulting on their present credit obligations.
It makes perfect sense. A consumer who needs a new loan may be signaling to creditors that they’re in financial distress, though this obviously isn’t always the case.
So that’s it. If you’re curious what a lender or landlord will see when they perform a credit check, pull your own credit report and score first. They see exactly what you see, minus any soft inquiries.
To avoid surprises, perform a self-credit check first.
Tip: It’s also a good idea to perform self-credit checks annually to ensure you aren’t the victim of identify theft.