What Is a Credit Check?

What Is a Credit Check?

Credit checks, sometimes called credit inquiries or credit pulls, are performed to evaluate your debt management experience and ability. When a company, creditor or financial institution checks your credit, they review one or more of your credit reports maintained by the national consumer credit bureaus (Experian, TransUnion and Equifax) and possibly the credit scores based on those reports.

The most common reason for a credit check is to predict the likelihood that you will repay money you borrow. Lenders, including banks, credit unions and credit card issuers, use credit checks to determine whether to issue you credit and the interest rates they'll charge you if you are approved.

Use of your personal credit history is limited under a federal regulation called the Fair Credit Reporting Act (FCRA) (more on that below).

Learn more: What Is My Credit Score?

Soft Credit Check vs. Hard Credit Check

Soft and hard credit checks serve different purposes and affect your credit differently. Here's how they compare:

What Is a Soft Credit Check?

A soft credit check, also called a soft inquiry, is a review of your credit report and possibly a credit score that's unrelated to a decision to offer you credit. Common examples include:

• A creditor or service provider reviewing your account for promotional offers or credit limit changes
• A landlord or property manager screening your rental application (though these can sometimes be hard inquiries)
• An insurance company pulling a credit-based insurance score to set your premiums
• A lender running prequalification for a credit card or loan offer
• You checking your own credit report or score

Soft credit checks are recorded in your credit reports and remain for up to two years. However, they won't affect your credit scores because they aren't directly linked to a credit application.

What Is a Hard Credit Check?

A hard credit check, or hard inquiry, is conducted in connection with an application for a loan or other form of credit. When a potential lender seeks your credit report from one of the credit bureaus, the bureau notes the request as a hard inquiry on the credit report it maintains for you.

A hard inquiry can indicate to others who check your credit report that you're in the process of seeking new debt, or that you've recently accepted a credit offer. Lenders see potential risk in any uncertainty about your debt level, and credit scoring systems may reflect that by lowering your credit score by a few points when a hard inquiry appears.

A single hard inquiry typically takes less than five points off your FICO^® Score. Hard inquiries affect FICO^® Scores for up to 12 months but stay on your credit report for two years. Multiple hard inquiries in a short period can have a compounding negative effect on your score.

Tip: When rate shopping for a mortgage, auto loan or student loan, submit all your applications within 14 days. The FICO^® Score model counts multiple inquiries for the same loan type as a single inquiry if they fall within a short window—14 days for older FICO models and 45 days for newer ones.

Learn more: Hard Inquiry vs. Soft Inquiry: What's the Difference?

Who Can Perform a Credit Check on Me?

The FCRA allows credit checks by the following parties in connection with certain activities:

• Lenders and other creditors: This typically happens when lenders review credit as part of processing loan and credit applications, extending credit offers, monitoring accounts and attempting to collect debts. (Standard credit application forms include permission to conduct credit checks.)
• Insurance companies: In most states, insurers can use credit-based insurance scores to determine whether to extend offers of insurance coverage and to set premiums.
• Government authorities: Credit checks may be used to determine eligibility for government benefits or licenses.
• Employers: Specific regulated industries, such as banking and securities trading, may check credit when hiring or promoting employees, especially for positions with financial responsibilities.
• Rental and certain other companies: Credit checks are allowed when processing rental applications and other transactions you initiate that show a legitimate business need for a credit check (setting security deposits on leased or rented equipment, for example).

The FCRA also permits the credit bureaus to provide your credit report in response to:

• Court orders, subpoenas and authorities enforcing child support orders
• Companies providing credit management or insurance services to your lenders
• Your written instructions

Tip: Some applications can result in either a hard or soft inquiry, such as a rental application. You can check with the company to find out which type they use if you want to be sure.

How to Get Your Credit Ready for a Credit Check

Before doing anything that could trigger a credit check, like applying for a loan, credit card or apartment, take these steps to avoid surprises:

1. Review your credit reports and scores. Look for anything unexpected, like accounts you don't recognize or late payments you don't remember. You can check your free Experian credit report anytime, and you can get free weekly reports from all three credit bureaus at AnnualCreditReport.com.
2. Dispute inaccuracies. If you find an error, you have the right to dispute it with the credit bureau to correct it.
3. Work on your credit if needed. If you're worried your credit isn't strong enough, consider taking six months to a year to improve your credit before applying.
4. Get prequalified. Use prequalification when shopping for credit cards or loans to narrow your options without piling up hard inquiries.
5. Lift any freezes or locks. Security freezes, which you have the right to place, and credit locks block lenders from accessing your credit, so you'll need to lift them before applying.

Reminder: Checking your own credit always results in a soft inquiry. It will never lower your credit score, no matter how often you do it.

Frequently Asked Questions

The Bottom Line

Credit checks are obviously important if you're trying to borrow money, but they also play an important role in many other common transactions, from insuring your car to renting an apartment. Free credit monitoring from Experian can help you keep tabs on changes to your Experian credit report and the credit score based on it, so you'll know what to expect whenever you consent to a credit check.