How does a credit check work?

Is there any such thing as a no-credit-check lender?

When you ask a company to extend a line of credit to you through a credit card or loan, or when you want to lease a car, buy a home, or rent an apartment, the company will conduct a credit check.

First, they conduct a “soft pull” on your credit to get an estimate of how much risk you pose to them as a customer. They estimate your interest rate and other details of the loan or line of credit. If you accept the terms, they conduct a “hard pull” on your credit.

They do this by using your social security number, full legal name, and date of birth, to look closely at your credit files with Experian, Trans Union, and Equifax. These three major credit reporting bureaus organize and report payment history, debt levels, and negative events like charged off accounts, judgments, and liens.

Before any person or company can conduct a hard pull on your credit files, they need to ask for and receive permission from you to do so. This is called a “hard pull” on your credit. You can see a list of companies that have conducted a hard pull by checking your credit reports.

If you give permission for a company to do a hard pull, you’ll lose a few points from your FICO credit score. Applying for a number of credit cards or personal loans in a short amount of time could seriously hurt your credit. For this reason, it’s important to research the company and their credit card or loan terms before filling out an application and granting them permission to look closely at your credit files. If there’s any confusion about what type of credit check a company conducts, be sure to ask before you grant permission for them to look into your financial affairs.

Under what circumstances might you be asked to grant permission for a credit check?

Any time you borrow money, you’ll have to authorize a credit check. There are other reasons companies may check your credit, as well. Here are some financial products and services that require a credit check:

  • Auto insurance
  • Life insurance
  • Cell phone contract
  • Cable television contract
  • Electric and natural gas service
  • Apartment or home rental company

What is a company looking for when they do a credit check?

If you are applying for a credit card or loan, the company wants to understand how you’ve handled this type of financial product in the past. They’ll look for late payments, charge-offs, accounts that were sent to collections, and judgments.

If you ask your current credit card company for a credit line increase or want a home equity line of credit, you’ll have to submit to a credit check, even though you previously qualified for the loan or credit card.

How can an individual find out what’s in their credit file?

Everyone with a social security number is, according to federal law, entitled to one copy of each of their three credit reports once every 12 months. You can get your copy of your credit reports at www.annualcreditreport.com. There are many websites and companies that offer this service, but they may charge a fee or require you to sign up for a credit monitoring service subscription.

The federal government has authorized www.annualcreditreport.com to provide free credit reports and you don’t need to enter any method of payment on their website to receive yours.

What if there’s incorrect information in one or more of the credit files?

The three credit bureaus (Trans Union, Experian, and Equifax) simply report what they are told by various banks and companies that you have credit cards and loans from. If the company reports incorrect information, makes a mistake or doesn’t follow the rules when reporting information about your payment history, it’s your right to have that information corrected or removed from your credit file.

Here’s how to correct a mistake in your credit report:

  1. File a request with the credit bureau publishing the false information.
  2. They will contact the company that made the incorrect report and ask them to provide proof.
  3. If the company can’t or won’t do so within 30 days, the credit bureau will remove that information from your credit report.

Simply having incorrect or expired information removed from your credit report can help boost your credit score. For this reason, it’s important to take the time to look closely at the information in each of your three credit files.

How long does it take for a company to conduct a credit check?

The credit check process is done via computer in just moments. Rental companies and small business can even access credit information (with your permission) with the help of a tri-merge report, which simply finds your three credit scores and reports the average.

Unfortunately, there really isn’t any such thing as a lender that’s willing to hand over money without checking your credit, first. The closest thing you can get to a lender that doesn’t conduct a credit check is a PayDay Loan provider, but they will verify income with a pay stub.

Your credit score is important, and it influences nearly every part of your financial life. Even if you don’t understand everything about credit, take the time to look at your personal credit report and make sure you understand the information there.

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