What is a Credit Check? How does it Affect your Financial History?

Whenever you apply for a credit or loan, it’s recorded in your financial history. It forms a significant part of your financial behavior and information for all your potential money lenders and is known as your credit history. It reflects how well you can handle loans or credits and repayments. It is also directly proportional to numerous factors that determine your financial behavior. 

From paying your credit card bills to maintaining a good credit score, nothing goes unnoticed by the money lenders. Your credit check should give a good impression so the lenders will smoothly process your loan or credit application. 

What is a Credit Check? 

A credit check or credit inquiry refers to your detailed credit history as a borrower. Simply put, it reflects your past financial behavior while dealing with credit card payments, leases, and loans. Banks, money lenders, or other credit and service providers usually perform the credit check before they decide to accept your loan or credit application. It aids lenders in the assessment of the risk involved in lending their money. 

Since every borrower’s payment history is unique, it helps identify their risky behavior. It also provides information about the existing loans, past credits, and even the financial habits of the borrower. 

Who Can Check Your Credit History? 

The entities accessing your credit history are banks or lenders to whom you’ve applied for loans or credit cards. Apart from you, banks and money lenders, individuals and entities like landlords, service providers, utility companies, insurance companies, employers, etc., can also access your credit history.

Banks and potential money lenders often conduct credit checks when you apply for a loan. If you wish to be pre-approved for an online loan, the lender or the agency will already have completed a soft inquiry or credit check before offering you the pre-approved loan. 

You must know who has access to your credit history. Lenders or banks can conduct a soft or hard inquiry before they offer you any credit. You need to know that a soft inquiry doesn’t affect your credit scores while a hard inquiry can.  

How Does A Credit Check Work?

The three credit bureaus, Experian, Equifax, and TransUnion, can track your credit history. They will also have an updated list of all lenders from whom you have already borrowed. This lenders’ list is updated every month. Hence, the bureau will have your updated credit history.

The Fair Isaac Corporation (FICO) and Vantage Score also analyze the reports to create your credit score. When the bank or lender makes a credit enquiry, they receive a copy of your information from the bureaus. This report is then thoroughly reviewed to determine your capacity to repay the borrowed amount. Your loan application is approved or rejected based on this repayment history.

How to Check Your Credit Report?

You can access your credit report from these three major bureaus once a year. It is essential to check your credit report regularly to spot any malicious activities and to track your repayments. It also helps you understand your financial behavior. You can also know your credit status before applying for additional credit. You can also get your credit report for free if your loan has been recently denied.

Conclusion

A credit report plays a vital role in your loan application. You should also know entities that can access your credit report. Inform the authorities immediately if you spot any suspicious activity on your account. It is advised to maintain a good credit history at all times for the smooth processing of your loan application.