What’s Involved in the Credit Check Process?

Liliana Pantoja
Liliana Pantoja
the front of a credit card

People often find the credit check process to be mysterious. You apply for a loan or credit card, and then you may find out you don’t qualify for the offer because of your credit. But what does that mean, exactly, and what’s the process of a credit check?

Read on to find out what a credit check is and why they happen, as well as learn how to check your own credit and bypass credit checks completely while still potentially getting approved for a loan.

What Is a Credit Check?

A credit check occurs when someone pulls your credit score and/or credit report. Reasons for pulling someone’s credit history can range from evaluating them as a borrower to trying to determine if someone might make a high-risk tenant, employee or insurance customer.

What’s a Hard Inquiry vs. a Soft Inquiry?

Credit checks run on you by other entities come in two main varieties: soft and hard inquiries.

The details shown to the requester are the same for each of these inquiries. The differences are in the reason behind the query and how it impacts your credit.

  • Soft credit inquiries can occur with or without your permission, depending on the entity making the request. They’re commonly used by lenders to pre-evaluate you for a credit offer. For example, if you receive a credit card offer that says you’re pre-approved, that company likely did a soft inquiry. Other reasons for soft inquiries include employment background checks and applications for auto insurance or utility services.
  • Hard credit inquiries can only occur with your express permission and are only used when you have applied for a loan or other form of credit and the lender is evaluating your application.

Soft credit inquiries don’t impact your credit. They also only show up on your credit report for you — lenders and others can’t typically see them.

Hard inquiries can reduce your credit score by a couple of points for up to a year. They stay on your credit report for 2 years and can be seen by others pulling your credit. Too many hard inquiries in a short amount of time can drive down your score and make you look like a risky and desperate borrower, so you typically want to be careful and only apply for credit when you really need it and believe you will be approved.

How Is a Credit Check Performed?

Most lenders and other entities that perform hard credit checks have computer software programs which allow them to run a credit check instantly; however, they have to have your permission to do so. Typically, when you apply for credit and the lender plans to pull your credit report and score, you assent to the check with your signature.

How Are Credit Scores Calculated?

Credit scores are calculated using complex scoring models. Two of the most common are FICO and VantageScore. Even with these two models, there are multiple versions. This is why your credit score can differ slightly depending on which credit bureau you look at or what agency is pulling it.

Even with those differences, credit scoring models typically look at five major factors in determining scores. Those factors are:

  • Payment history. This is the biggest factor in your credit score, making it critical to make your payments on-time and consistently. This factor includes whether you run late on payments as well as whether you have delinquent accounts, foreclosures or collections accounts on your report.
  • Credit utilization. This is how much of your revolving credit limit you are currently using. For example, if you have credit cards with a total limit of $5,000 and you currently have total account balances of $2,500, then your credit utilization rate is 50%. Typically, the lower your credit utilization rate, the better.
  • Age of credit. This refers to how long you’ve had a credit history as well as the average age of all your open credit accounts. Well-established, lengthy positive credit history can drive your score up.
  • Type of credit or credit mix. Creditors — and credit scoring models — like to see that you have a good mix of credit accounts, including both installment and revolving credit. It shows that you’re able to manage various accounts responsibly.
  • Hard inquiries. As discussed above, how many hard inquiries you have on your account the past 12 months can impact your credit.

Who Can Check My Credit Report?

Many people can check your credit report, including you. Lenders, employers, landlords and certain service providers, including insurance and utility companies, can check your report if you say they can. And some lenders can check your report even if you don’t allow them to conduct a soft inquiry.

If you’re worried about the information in your credit report being so readily available, you’re not alone. Many people have concerns that all that data might be used to steal their identities or for other nefarious reasons. To that end, you can temporarily freeze your credit if you decide you want to prevent access for a period of time.

In order to do so, simply contact the credit bureau in question and ask that they freeze your credit. No one will be able to pull it until you unfreeze it, and that includes anyone you want to pull your report. You’ll have to unfreeze your credit before you apply for a loan that requires a credit check. You also have to freeze and unfreeze credit with each of the three major credit bureaus (TransUnion, Experian and Equifax) separately.

How to Get Your Own Credit Report

You can get a copy of your own credit report in a number of ways. The first is to request it for free via AnnualCreditReport.com. You can get one free report per year from each of the main credit bureaus via this site.

There are a number of providers you can pay in order to access a copy of your full credit report more often. And if you’ve been denied for credit or services based on your credit report or score, you have a legal right to know that, too. The entity denying you must provide you with a letter that tells you as much and lets you know which credit reporting agency the data came from. Using that letter, you can request a copy of your report in writing from the agency.

What Is a Good Credit Score?

That depends on which scoring model is being used and what you need the credit score for. According to Equifax, though, a good or better credit score is one that is 670 or higher.

How to Get a Good Credit Score

You can build or improve your credit score by using credit responsibly. That means keeping your credit utilization low and making payments in a timely manner. Ensure that you’re working with lenders who are reporting to the credit bureaus so that you get the benefit of those timely payments. You may also want to check your credit regularly and dispute any inaccurate negative information with the credit bureaus in writing.

How to Bypass a Full Credit Check When You Apply for a Loan

But what if you need money right now and you know your credit isn’t stellar? It may be that you’ve made some mistakes in the past and you’re trying to build your credit or that you’re young and haven’t had time to build your credit yet. Either way, you might be able to bypass a full credit check by applying for a personal loan through Wise Loan.

Apply today! The process takes less than 5 minutes.

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

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