Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
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A credit check is when a lender or other organization reviews your credit information to better understand your history managing financial obligations. It typically involves obtaining your credit report from one or more of the three national credit bureaus (Experian, TransUnion and Equifax) and possibly a credit score based on each requested credit report.
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 credit bureaus 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, if so, the interest rates they'll charge you.
Credit checks aren't only associated with credit applications, however:
- Landlords and property managers may use them when screening home and apartment rental applicants, to gauge general financial trustworthiness and to help set the amount of security deposit they require.
- Utility companies may use credit checks to help decide whether to require a security deposit.
- Some employers make credit checks part of their pre-hiring background screenings.
- Car insurance companies in many states use a special type of score called a credit-based insurance score to help set premiums.
Use of your personal credit history is limited under a federal regulation called the Fair Credit Reporting Act (more on that below), and credit checks can be divided into two categories: hard and soft.
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 about to take on new debt, or that you've 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. Scores typically rebound after a few months if you keep up with your bill payments, but the hard inquiry will remain on your credit report for two years.
What Is a Soft Credit Check?
A soft credit check, or soft inquiry, is a review of your credit report and possibly a credit score that's unrelated to a decision to offer you credit. Examples include checking your own credit report or credit score, and when you use the credit prequalification process to get estimated borrowing terms from credit card issuers or other lenders. Soft inquiries may also be used during insurance rate setting or apartment rental applications.
Soft credit checks are recorded in your credit reports but won't affect your credit scores because they aren't directly linked to the possibility of taking on new debt.
Differences Between Hard and Soft Credit Checks
The differences between a hard credit check and a soft credit check are summarized below:
| Soft Credit Checks | Hard Credit Checks |
|---|---|
| Do not affect credit scores | Can affect credit scores for up to a year |
| Occur when you check your own credit, during credit preapproval, to see if you prequalify for certain offers or when an existing creditor checks your credit | Occur when a lender checks your credit during the loan application process |
| Do not require your written consent | Generally require your written consent |
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 some states, insurers can use credit-based insurance scores in determining 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 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
How to Get Your Credit Ready for a Credit Check
To avoid surprises before you take an action that could trigger a credit check—applying for a loan, credit card or apartment rental, for example—consider taking these steps.
- Review your credit reports and scores.
- If you find an inaccuracy in a credit report, you have the right to dispute it with the relevant credit bureau to correct the record.
- If you're concerned lenders may not view your credit reports or scores as favorably as you'd like, consider taking six months to a year to work on improving your credit before you submit your application.
- Get prequalified (which uses soft credit checks) when shopping for credit cards or loans, to narrow your search without incurring multiple hard inquiries.
- Lift any security freezes or credit locks on your credit reports. Credit freezes and locks limit lenders and many other permitted parties from accessing your credit reports, so you must remove those safeguards to enable processing of credit checks.
Frequently Asked Questions
Soft credit checks have no impact on your credit scores.
Hard credit checks cause small dips in credit scores. Scores usually rebound within a few months, but multiple hard inquiries over a short period of time can have a cumulative negative effect on your credit scores.
Both hard and soft credit checks remain on your credit reports for up to two years. Only hard credit checks have an impact on your credit, and their effect will typically fade over time.
Yes. You can obtain a free copy of each of your credit reports once per week at AnnualCreditReport.com, and you can check your credit scores from a variety of sources, including getting your credit score from Experian for free, based on your Experian credit report.
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.