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What is a credit check?

What Is a Credit Check? What You Should Know Before You Get One

Updated on October 23, 2022


If you borrow money from a reputable source, the lender doesn't simply put money in your hands. They assess your financial position or creditworthiness to corroborate that you can repay the borrowed amount. How do they do it? By performing a credit check. Read this article to understand a credit check, why it's necessary, how it works, and if it will affect your credit score.

How Does It Work?

Three major credit bureaus maintain reports on borrowers: TransUnion, Equifax, and Experian. These bureaus collect monthly updates on the status of your accounts from companies or institutions where you have borrowed money. These reports are used to calculate your credit score. While applying for a personal loan or credit card, companies or banks evaluate your creditworthiness and capability to repay the money using your credit score.

Soft Credit Check vs. Hard Credit Check

If you ever had your financial or credit history checked when borrowing, it means you have experienced what is commonly known as a hard credit check. Now, you might wonder what this is and if there is more than one credit inquiry. Yes, there are two types of credit inquiries: Soft credit checks and hard credit checks. Although both show moderately similar results, i.e., your credit history, they serve different purposes.

Soft Credit Check

A soft credit check is when a company or a third party checks your credit history for background verification. It also occurs when you inquire about your financial history. Both the searches will classify as soft inquiry; however, the results will differ. For instance, when a company runs the check to validate your background or your qualification for credit, they only receive limited information:

  • Your name
  • Date of birth
  • Current address and address history
  • A brief glimpse of your financial history

When you run a soft inquiry on yourself, you receive detailed information with the entire credit report. The law permits you to request one free credit report each from the three national reporting bureaus yearly.

Hard Credit Check

Lenders conduct a hard credit check when you apply for a loan. When you seek credit, the lender runs a credit check to verify your financial history. It's necessary to perform a credit inquiry to ascertain your creditworthiness. It allows the companies or financial institutions to know your capability regarding repayment. Plus, hard credit checks assist in determining the appropriate interest rate on loans.

A hard credit check gives a complete view of your credit history. It shows the lender how you handled your earlier debts and if you repaid them promptly.

What is a good credit history length?

Why Would a Credit Check Be Necessary?

There can be several reasons behind a credit check. It depends on who is performing it and whether they want to know your entire credit history or a basic idea of past financial engagements to verify your identity. For instance:

  • A lender or financial institution may want to know your payment history to determine if you are worthy of the loan.
  • An employer might run a credit inquiry on you to verify your identity and access information regarding your
  • mortgages, debts, or delayed payments.
  • Landlords check your credit history to ensure you will pay the rent on time.

Who Can Run a Credit Check on Me?

You can do a self-credit check to know your credit score. Third parties, like companies or financial institutions, can also run a credit inquiry on you. However, they must have a valid reason behind it. This reason behind the search will decide whether they can conduct a hard credit check or a soft check.

You can expect a credit check when applying for credit for a car loan, mortgage, loans, or credit card. Banks and financial companies might run a check on you when you open credit accounts with them to know your payment history. Some examples of organizations that can conduct a credit check before lending various types of loans or credit are:

  • Any company you are in a contract with
  • Utility companies and service providers like gas, electricity, etc.
  • Insurance companies
  • Employers
  • Landlords

What does a credit check show?

What Does a Credit Check Show?

Credit reports vary depending on the organization that performs them. When a company executes a hard inquiry, they view your entire credit report. However, if they or you look at your credit history for pre-qualification, it falls into the soft credit checks. A soft credit inquiry shows restricted or limited information to a third party while you get detailed research. Some of the data a credit check includes are:

  • Name
  • Date of Birth
  • Address history
  • Social Security number
  • Registration on the electoral roll
  • Overdrafts (current)
  • Any hard or soft inquiries
  • Current credit, loan, or mortgage, including the credit limit and amount owed
  • Credit paid in the past six years
  • Late or missed payments
  • Any DROs (Debt Relief Orders), IVAs (Individuals Voluntary Arrangements), home repossessions, or bankruptcy
  • Any fraud you have committed

Do Credit Checks Lower Your Score?

The impact of a credit check depends on whether it is a soft or hard inquiry. A hard credit inquiry affects the credit score negatively. Soft credit checks, conversely, do not impact your credit score in any aspect.

A credit report shows all your earlier loans and credits. Frequently applying for loans or open credit accounts will affect your score. It casts a negative shadow on your financial situation to the lender when you use and obtain several credits over a short period.

How Long Does a Credit Check Last on a Credit Report?

Soft credit inquiries are not visible on your credit report. A hard credit inquiry, however, stays for as long as two years if they are legitimate. If you find an unknown company's name searching for your credit history, you can notify a credit bureau to remove it from your report.


Banks, lenders, or service providers perform a credit check when they need to check your financial history. It provides information about past and existing credit, types of loans that you have, and payment habits so your level of risk to the lender can be assessed.