Have you ever applied for a loan or credit card and heard the term "credit check" thrown around? Maybe you've wondered what it means exactly. A credit check is essentially an assessment of your financial history that grants access to your credit report. This report provides information about your past credit payment habits, as well as other factors that could affect your risk level as a borrower.
There are two types of credit checks: hard inquiries and soft inquiries. A hard inquiry occurs when a lender or bank pulls your credit report to assess your creditworthiness for a loan or line of credit. This type of check can slightly lower your credit score and stays on your report for up to two years. On the other hand, a soft inquiry (also known as a soft check) occurs when a service provider performs an assessment of your financial history for purposes such as pre-approvals or background checks. These types of checks do not affect your score and typically remain on your report for only one year. Understanding how each type of credit check works is crucial in maintaining good financial standing.
In this article, we'll dive deeper into the world of credit checks, explore how hard inquiries affect your score differently than soft inquiries, and provide tips on how to maintain a healthy financial history while still seeking out new lines of credit. By the end, you'll have a better understanding of this critical aspect of personal finance and how it impacts your overall financial health!
What is a Credit Check: Understanding the Basics
A credit check is a review of your credit history by a lender or other organization with whom you are considering entering into a significant financial commitment such as obtaining a loan, credit card, lease, or utility service. This inquiry grants the lender permission to access your credit report from one of the three major credit bureaus - Experian, Equifax, and TransUnion.
Your credit report contains detailed information about your payment history on loans and lines of credit, including missed payments and defaults. A credit inquiry allows lenders to determine whether you are financially responsible and can make payments on time. It is essential to understand what a credit check is and how it works because it can have a significant impact on your financial future.
Discover How to Verify Your Credit Report Without Hassle
If you're wondering how to verify your credit report without hassle, look no further. It's important to regularly check your credit reports from the three main bureaus (Equifax, Experian, and TransUnion) to ensure there is no potentially fraudulent activity. Luckily, you're entitled to a free report from each bureau every 12 months under the Fair Credit Reporting Act.
To get started, visit the individual bureaus' websites and request your free annual reports. You can also request a free report if you've been denied credit or experienced other adverse action due to your credit score in the past 60 days. By verifying your credit report before applying for a loan or credit card, you'll have peace of mind knowing that everything is accurate and up-to-date.
How Soft Inquiries Affect Your Credit Score
Soft inquiries occur when someone checks your credit report, but it doesn't affect your credit score. This includes when you check your own credit report, a prospective employer requests permission to check your credit score, or when you receive pre-approved credit card offers from a credit card company. These types of soft inquiries won't impact your credit score because they are not initiated by actively seeking new credit.
However, unsolicited credit card offers that come in the mail may result in a hard inquiry if you decide to apply for the offer. To prevent receiving these types of offers, consider calling 888-5-OPTOUT (888-567-8688) to opt-out from pre-screened credit and insurance offers. It's important to keep track of both soft and hard inquiries on your credit report as they can affect loan approvals and interest rates in the future.
Necessary Conditions for Conducting Employment Credit Checks
Employment credit checks are a popular screening tool that employers use to evaluate the financial responsibility of potential employees. However, before conducting a credit check, there are some necessary conditions that employers must adhere to. For instance, employers must have written permission from the applicant to conduct a credit check.
Additionally, employers must ensure that they are legally entitled to perform a credit check. This means that they must follow federal and state laws surrounding employment credit checks. One of these laws is providing applicants with a free copy of their credit report if an issue occurred during the hiring process.
Finally, it's essential for employers to prepare themselves for potential issues that could arise during the employment credit check process. For example, applicants may experience financial challenges due to an emergency medical issue or car payment due. As such, it's important for employers not to solely rely on an applicant's past credit issues but rather assess them on a case-by-case basis. By following these necessary conditions, employers can conduct thorough employment credit checks without violating any legal requirements or causing undue stress on applicants.
Key Takeaways: A credit check is a way for potential employers to evaluate a candidate's credit history and how they've handled consumer debt. The credit check includes personal information and credit reports, which can be obtained by employers through professional background screeners. The FCRA sets standards for employer credit checks, while the EEOC oversees pre-employment inquiries to ensure that hiring decisions aren't based on discriminatory factors. Stricter laws are being passed to ban employment credit checks, such as the NYC Human Rights Credit Check Law. It's important for employees to obtain copies of their credit reports and correct any errors.
What Is a Credit Inquiry?
The term credit inquiry describes the process of a third party sending a request to one of the major credit bureaus for credit information. This step is commonly known as a credit check or credit pull, and it's done by companies making decisions about your creditworthiness, such as lenders, landlords or employers.
When someone requests your credit report from a credit reporting agency, it creates what is known as a "credit inquiry" on your credit file. There are two types of inquiries: hard inquiries and soft inquiries. Hard inquiries are typically initiated when you apply for new credit and can affect your credit score, while soft inquiries are usually made by companies checking your existing accounts or by yourself during a routine checkup. It's important to note that federal law allows you to freeze access to your credit report and prevent any unauthorized inquiries from being made without your permission. Understanding what a credit inquiry is and how it affects your overall financial health can help you make informed decisions when it comes to managing your finances.
Frequently Asked Questions
Are credit checks essential to hiring good employees?
Credit checks can be a helpful tool for some employers, particularly those hiring for financial or high-security positions. However, they are not always necessary and should be used judiciously to avoid discrimination.
What does soft credit mean?
Soft credit refers to a credit inquiry that does not affect your credit score. It is typically used for background checks, pre-approved offers or by lenders during the loan approval process.
What is a hard pull credit check?
A hard pull credit check is an inquiry made by a lender to obtain your complete credit report and score. This can potentially lower your credit score and can only be initiated with your permission.
What does a credit check reveal?
A credit check reveals information on your credit history, including your payment history, outstanding debts, and any bankruptcies or judgments. It is used by lenders to determine your creditworthiness when applying for loans or credit cards.
Can my potential employer require a credit check?
Yes, potential employers can require a credit check as part of their hiring process. However, they must obtain your written consent and comply with applicable state and federal laws.