A credit check is a summary of a consumer’s existing and past credit, payment habits, and types of loans taken out, and it’s used to assess the creditworthiness and risk level of the consumer, according to The Balance. Lenders, banks, and service providers conduct a credit check to understand a potential borrower’s financial history.
A credit check indicates how you handle credit and how much more credit you can take on without an undue amount of risk.
You’ll give permission for the lender to check your credit in your application for whatever financial commitment is being considered, whether you’re looking to take out a new line of credit (like a mortgage loan, for example). Your lender will then check your credit by requesting a report from one of the three major credit bureaus (Experian, Equifax, or TransUnion).
The credit bureau will then provide a copy of your credit report to the lender, which will outline information like your credit score, your on-time payment history, and your debt (both current and past). The lender will review this information to determine whether you qualify for their loan or service, along with details such as how much money you can borrow if you’re seeking a new line of credit.
A hard inquiry is a credit check triggered by an application for a loan or credit, and you should pursue them with caution. If you apply for multiple new credit lines in a short period of time, you may be seen as a higher lending risk and your credit score may take a temporary hit, according to The Balance. However, not all loan types impact your credit score equally – multiple credit cards opening at once is riskier for lenders than a batch of inquiries that involve rate shopping, like student loans, auto loans, and mortgages. Lenders treat the latter category as a single inquiry, allowing you to find the best rate without harming your credit score.
Typically, “FICO will consolidate all rate-shopping hard inquiries if they fall within a 45-day window,” The Balance notes.
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