Cracking the Code: What Exactly is Involved with a Credit Check?
The concept of credit checks, probably isn’t all that new to you. If you want an auto loan, mortgage or some other form of lending from the bank, you know that they’ll have to check your credit before you can get approved. And you most likely know, that the state of your credit will determine whether you get through or not. Good credit means you’re in, bad credit means you’re out – simple. But do you know what it actually involves? Are you aware of how certain institutions can access it? If not, and you’re still asking, “what is a credit check exactly?”, then it’s worth taking a deeper look at how they work.
Under the Microscope: What Does a Credit Check Entail
As mentioned in the opening paragraph, common knowledge of credit checks is quite scant. It’s somewhat similar to what researchers understand about the human body – quite a bit yet very little at the same time (a paradox indeed!). But fortunately, credit checks aren’t as complicated as our anatomy, and what’s involved with them is quite simple.
A Look at Your Information
After you apply for a credit card or a car loan, for example, a lender will contact what’s known as a credit bureau. Basically, a bureau keeps your credit information (as well as millions of other people) on file. There are hundreds of these companies, but most of them are affiliated with three major bureaus – Equifax, Experian, and TransUnion. The lender or creditor you’re dealing with gathers this information from the bureau, and then contacts the credit reporting agency. Generally, the details they collect include the basics, such as your address and contact information. But they also collect records of your payment history and transactions – a key factor that gives the lenders a thumbs up or red flag.
It’s the interpretation of your info that’s most crucial. This is where the grounds for your approval or denial is formed. The section before mentions your payment history and although it’s important, it’s not the only piece of information that a credit reporting agency cares about. They’re also taking a look at other things, such as the amount of inquiries you make. There are the hard inquiries, which show on record if you’re making purchases that require credit checks, or if you’re applying for loans. A record of multiple hard inquiries might imply to lenders that you’re in a tight spot financially, perhaps relying too much on credit. Soft inquiries – such as you checking your own profile or an employer doing so (which we’ll discuss in a bit) – usually don’t create any problems. In addition to inquiries, credit reporting agencies also check for things like open credit accounts, maxed-out credit lines, and your debt to income ratio.
Whose Meddling With Your Credit Anyway?
Now you might be among the people wondering who has access to your credit information. There’s both good and bad news. The bad news is, that the banks and crediting companies aren’t the only ones who can review your credit history and profile. The good news, though, is that parties who have access to your credit information will only do so if necessary, and won’t in any way make it public.
You see, your credit info is your financial fingerprint or DNA. Although it reveals everything about you, it indicates the person you are likely to be when it comes to how you spend, save and pay bills. These habits may relate to certain personality traits that other people either look for or avoid. At the most basic level, your credit information hints at how you’ll be able to pay back debt. And for that very reason, there is a list of people who you’ll deal with quite regularly, who want to see this info.
A Tough Crowd
- Financial institutions – The most obvious set of people who look at your credit are financial companies and organizations. These are the banks, credit and loan companies. Since they are the ones who usually hand loans and financing of different sorts, they are the ones who will check your credit the most.
- Potential employers – This one might come as a surprise. Yes, some employers will want to see what your credit looks like and as strange as it may seem, it makes sense in certain instances. Those looking for a job in the business or financial sector will most likely get a credit check since employers in these industries wouldn’t want a person whose bad with money, to handle money. An employer might be more inclined to take this step if your employment history suggests that you may have had money troubles in the past.
- Landlords – Whether you like your landlord or not, they do have the right to check your credit. One of the biggest frustrations a landlord has to face is a tenant who can’t pay rent on time. So to spare themselves from trouble, they might peek at your credit history to get a better idea of how you’ll be when it comes time to pay up.
Put Yourself at Ease
Anxiety and nervousness is a troubling issue for some people who know they’re up for a credit check. For example, if you’ve got poor or unestablished credit, the mention of a “check” alone might make you uncomfortable. It’s probably just as intimidating as baggage checks at the airport! But there are ways of keeping calm if you have these thoughts.
Taking the Pressure off of a Credit Check
- Perfection isn’t necessary – Very few people have perfect credit, including those who fall in the “excellent” range, yet they still get approved for all kinds of financing. And even if you’re not in an ideal range, there are many lenders who offer loans to those who have credit troubles.
- Too many factors to judge – Remember, your credit score and payment history aren’t the only things that lenders use to determine whether you’re a good fit for a loan or not. Other factors come into play, such as the amount of debt you hold, and the income you generate. That’s why someone who has a healthy credit score can be denied for a loan, if the money they’ll burn will outweigh the cash they earn.
- It’s not over yet – Just because you didn’t get that business or car loan the first time, doesn’t mean you’ll never get one. Lenders tend to have standards that are unique to them. So it’s very likely to have two companies, who could be sitting right next to each other, view you in completely different ways. That’s why keeping a positive attitude while looking for a loan is important.
For some strange reason, there seems to be an air of mystery that surrounds the “credit check”. It’s almost as if it’s this mystic activity that only a select few understand. However, it’s actually easy to grasp once you’ve figured it out, and there are benefits that come with this understanding. At the very least, you won’t have to scratch your head about how it works. But the most important lesson you’ll get out of it is a reminder of how important it is to maintain good credit. It’s only fair that you feel fearless when the time comes to have your profile reviewed. By keeping in mind the impact that credit has on your life, you’ll realize how important it is to take charge of your finances.