What Is a Credit Check?

Definition & Examples of a Credit Check

A sample credit report shows open accounts and their balances
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A credit check is something a lender, bank, or service provider performs when they need to check your financial history. It grants them access to information about your existing and past credit, payment habits, and types of loans so they can assess your risk level as a borrower.

If you’re applying for a loan, your prospective lender is likely to run a credit check—this means they’re looking at your credit history by reviewing one or more of the credit reports kept by the three major credit bureaus. The reports provide an indicator of how you handle credit and how much room you have for more. Learn about what happens when someone runs a credit check on you—and how to check your own credit report.

What Is a Credit Check?

When you apply for a significant financial commitment such as a loan, credit card, lease, or utility service, somewhere in the application you will grant that lender permission to check your credit. This allows them to pull a credit report from Experian, Equifax, or TransUnion, the three major credit bureaus. They want to be reasonably certain that you will make your payments, and this report gives them insight into your history as a borrower.

  • Alternate name: Credit inquiry

How Credit Checks Work

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. (FICO) and VantageScore to calculate your credit score, another critical indicator of your creditworthiness.

When the lender, landlord, or other institution makes the credit inquiry, they will receive a copy of your credit report from the credit bureau. They will review it to evaluate not only your credit score but whether you make payments on time and how well you can handle borrowing more money. This will determine if you qualify for a loan—and how much money you can borrow.

In addition to your credit reports and credit scores, lenders look at factors such as your debt-to-income ratio to determine whether you can comfortably afford to take on more debt.

How Hard Inquiries Affect Your Credit Score

This kind of credit check—triggered by an application—is called a hard inquiry. You may have heard that hard inquiries can ding your credit score, and that’s true—to an extent. If you apply for multiple new credit lines in a short period, you may be seen as a higher risk, and your score may take a slight hit temporarily.

How your score is affected by a hard inquiry depends on the type of loan that's generating the inquiry. If it’s the kind that typically involves rate shopping—say, a student loan, auto loan, or mortgage—FICO and VantageScore will treat all inquiries for that same type of loan as a single inquiry. They will assume you were just looking for the best rate. If you apply for multiple credit cards in a short period of time, however, these hard inquiries will be considered separately, because you're not looking for the single best lender.

FICO will consolidate all rate-shopping hard inquiries if they fall within a 45-day window. VantageScore uses a smaller time period: 14 days.

Hard inquiries have a much smaller impact on your credit score than other factors, such as the timeliness of your loan payments and your total debt burden. FICO considers hard inquiries from only the prior 12 months when determining your score and says each hard inquiry should take off less than five points.

How Soft Inquiries Affect Your Credit Score

Soft inquiries occur when you check your own credit report or you give a prospective employer permission to do so. These do not affect your credit score because you are not actively seeking new credit.

A soft inquiry can also occur when a lender wants to give you a preapproved credit card offer. The credit card company may make a soft inquiry without your knowledge or permission. If you don't want to receive those unsolicited credit card offers, you can opt out of them by calling 1-888-5-OPTOUT (1-888-567-8688).

Soft Credit Check vs. Hard Credit Check

Soft Credit Check Hard Credit Check
No effect on your credit score Can hurt your credit score
Happens when employers check your credit or credit cards run preapproval checks Happens when you are applying for credit with a new lender or service provider
Also occurs when you check your own credit Affects your score for a year but stays on your credit report for 2 years
Doesn't stay on your credit report Multiple inquiries for certain loans in a short time frame only count as one hard check

How to Check Your Credit Report

You should regularly check your own credit reports from each of the three main bureaus to spot discrepancies that may affect your ability to get a loan or indicate potentially fraudulent activity. You’re entitled to get a free report from each of the bureaus once every 12 months. And you may also get a free report if you have recently been denied a loan application.

You can request the reports through the individual bureaus' websites or at annualcreditreport.com, a site that's sponsored by the bureaus as a way of fulfilling their requirement to offer the free annual reports mandated by the Fair Credit Reporting Act.

The Consumer Financial Protection Bureau suggests getting a report from a different one of the three credit bureaus every four months so you can monitor your credit throughout the year.

If you see a mistake in a report, contact both the bureau and the lender in question and request a correction. And keep in mind that a hard inquiry by an unfamiliar lender may be a sign of fraud; notify the bureau that you have reason to believe you have been the victim of identity theft.

Each of your credit reports will be slightly different, so it’s important to check all of them eventually. Lenders update account information at different times, and not all lenders report every activity to all three bureaus. And because the bureaus are actually competing, for-profit companies, they don't routinely share information with each other. One exception is fraud alerts, something about which they are required to inform each other.

Key Takeaways

  • Credit checks are performed by lenders, credit card companies, and other service providers that need to make sure you will meet ongoing financial obligations.
  • Hard credit checks happen when you apply for new credit, while soft credit checks happen when you check your own score, a credit card company runs a preapproval, or you allow your employer to access your report.
  • Hard credit checks will hurt your credit score, but soft checks won't.
  • By law, you are allowed to check your credit report once per year with each of the three credit bureaus.

Article Sources

  1. Board of Governors of the Federal Reserve System. "Credit Reports and Credit Scores." Accessed July 8, 2020.

  2. Experian. "Debt-to-Income Ratio." Accessed June 8, 2020.

  3. FICO. "Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO® Score?" Accessed July 8, 2020.

  4. TransUnion. "How Rate Shopping Can Impact Your Credit Score." Accessed July 8, 2020.

  5. Experian. "Hard vs. Soft Inquiries on Your Credit Report." Accessed July 8, 2020.

  6. Consumer Financial Protection Bureau. "A Summary of Your Rights Under the Fair Credit Reporting Act," Page 2. Accessed July 8, 2020.

  7. Consumer Financial Protection Bureau. "A Summary of Your Rights Under the Fair Credit Reporting Act," Page 1. Accessed July 8, 2020.

  8. AnnualCreditReport.com. "About This Site." Accessed July 8, 2020.

  9. Consumer Financial Protection Bureau. "How Do I Get a Copy of My Credit Reports?" Accessed July 8, 2020.

  10. TransUnion. "How Long Does It Take for a Credit Report to Update?" Accessed July 8, 2020.

  11. Experian. "What Are Credit Bureaus and How Do They Work?" Accessed July 8, 2020.