What Is a Credit Check?

A sample credit report

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If you’re applying for a loan, your prospective lender is likely to run a “credit check.” This means that they’re looking at your credit history to determine if you’re a safe bet. The company checks your history by looking at one (or maybe more) of the credit reports kept by the three major credit bureaus—Experian, TransUnion, and Equifax. The reports show all your credit accounts and are the best indicator of how you handle your credit and how much credit you’ve already been extended.

If you’re applying for a job or apartment, your prospective employer or landlord may do a credit check; besides your credit history, your reports show whether you have been sued or arrested or have filed for bankruptcy.

Why Might a Company Check My Credit?

If you’re applying for a personal loan, auto loan, credit card, or mortgage, the prospective lenders will almost certainly do a credit check. They’re trying to determine if you make payments on time and whether you can handle borrowing more money. They also want to gauge the interest rate they will charge you. This kind of credit check—triggered by an application—is called a hard inquiry.

The three credit bureaus maintain their reports on millions of borrowers, getting regular updates—usually once a month—from the companies that have already loaned to you. The reports are used by Fair Isaac Corp. to calculate your FICO credit score, another critical indicator of your creditworthiness.

Besides your credit reports and FICO scores, lenders look at factors like your debt-to-income ratio to determine whether you can comfortably afford more debt. 

Do Credit Checks Affect My Credit Score?

You may have heard that hard inquiries can ding your FICO score, and that’s true—to an extent. If you apply for multiple new credit lines in a short period of time, you may be seen as a higher risk and your score may take a slight hit temporarily. It all depends on the type of loan generating hard inquiries. If it’s the kind that typically involves rate-shopping—a student loan, auto loan, or mortgage—your FICO score ignores if you’ve had a spurt of applications in the 30 days before scoring. It’s assumed you are just looking for the best rate.

Can Someone Check My Credit Without My Permission?

If it’s a hard inquiry like we’ve just discussed, no. In other words, if you’re trying to apply for a loan or job, buy a new car, or rent an apartment, the company you want to do business with is required to get your permission before checking your credit.

There’s another type of credit check that is called a soft inquiry, however, and these inquiries are often allowed without your permission. For instance, if a business wants to give you a pre-approved credit card offer, (you know all that junk mail you get trying to entice you with promotional rates?) it may be able to do a soft inquiry without your knowledge. Or, your current lenders may perform soft inquiries to make sure you’re still eligible for the credit limits and interest rates they've given you.

But don’t worry: soft inquiries won’t ding your credit scores, as hard inquiries can. In fact, in most cases, they can usually only be seen by you.

There are other specific circumstances in which your credit reports can be accessed without your permission. These have to do with legal matters, government benefits, child support, investments, and insurance.

Be Proactive

You should check your credit reports regularly to spot errors that may affect your ability to get a loan or indicate potentially fraudulent activity. Here are some things to remember:

  • Use annualcreditreport.com to check your credit reports for free. (You’re entitled to get a free report from each of the three bureaus once every 12 months.) You’re also entitled to a free report within 60 days of a company denying a loan application. 
  • Each of your credit reports will be slightly different, so it’s important to check all of them. Lenders update account information at different times and not all lenders report everything to all three bureaus. 
  • One of the most basic errors stems from using a different name when you apply for a loan. Make sure you’re consistent with your first and middle names, or your report may end up including information about another person with a similar name. 
  • If you see mistakes on your reports, contact both the bureau and the lender in question. All three bureaus have systems to make disputes online.