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What Are Credit Checks, Anyway?

Credit Check: What are credit checks anyway?

Maintaining good credit is important for consumers who want lenders to extend credit to them. There is no getting around good credit to ensure the best interest rates on loans. It is no secret that those with the best credit scores receive the best rates on their loans. How do lenders determine who the most creditworthy consumers are? Well, they conduct a credit check on consumers before allowing them to receive loans. Very few lenders extend money to consumers without doing a credit check. Consumers should know what information would turn up in their credit report before lenders pull their credit.

Overview of Credit Checks

Credit checks are thorough background checks that lenders use to decide if they should lend credit to someone. Lenders run credit through the three credit bureaus; they use the information that they receive from one or more of the credit bureaus to gain information about consumers’ credit history. The forms of contact that lenders may use are telephone calls to past lenders and pulling credit reports that contain credit scores and credit history. Just about any financial transaction includes a credit check during the lending process.

Credit checks include two component parts: credit history and credit score. The credit history is a close look at consumers’ credit report. Lenders want to examine the credit report for all open and closed accounts for the person who wishes to receive credit. The accounts that lenders view may include credit cards, mortgages, auto loans, student loans, and more. The payment history and balances on these loans are very important to lenders because they create a clear picture of the consumers’ ability to repay their debts.

Lenders also look closely at the credit score on the credit report. The credit score is often used first to decide if there is a need to give the credit report a further look. The score is an indicator of the information that lenders will see in the credit report. The majority of the credit agencies use the FICO score as a measuring tool for credit scores. They look for credit scores of 600 or higher to determine creditworthiness. A 600 credit score may be considered “good credit” for one lender and a 700 credit score or higher may be considered “excellent credit” for another lender. Interest rates vary greatly between these scores so consumers want to get their credit score as high as they possibly can before applying for credit.

Why Credit Checks Are Important

  • They can indicate whether someone is using someone else’s credit. There is nothing like walking into a lenders office to apply for credit and being denied because there were inaccuracies on credit reports. It is very easy for someone to open a line of credit in someone else’s name. It is also common that people with the same first and last name may end up with negative information of their credit a report that does not belong to them. Many people conduct credit checks on themselves to make sure that the information on their credit report is accurate.
  • They can indicate if someone should be extended credit. Lenders want to know how likely a lender is to repay their debts. Lenders may vary in what they consider good credit. Often when consumers apply for credit, the lender may run their credit through several lending companies to decide if they will extend credit. Larger financial institutions may have more flexible credit stipulations to receive credit.
  • Some use credit checks to secure deposits. Utility companies will often check credit before connecting utilities. The information that they find on a credit report may not cause them to deny services, but they may use the information to determine if a deposit is required. Deposits can be very expensive amounts of money that consumers must pay before the utilities are connected.
  • They determine the amount of money that consumers can receive and the interest rate on the loan. Good credit suggests that consumers are responsible with their credit and that they are financially reliable. Loan officers determine the amount of money that consumers can afford in a loan. Lower credit scores and negative credit history may prevent consumers from receiving low interest rates because they see these consumers as an extremely high credit risk.

The information found in credit checks plays an important role in the willingness of lenders to extend credit to consumers. It is vital that consumers know what information is included in each of their credit reports well before they apply for credit. Mistakes happen. No one wants to be on the receiving end of negative credit.

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