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 that 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 in 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 for in order to access a copy of your full credit report more often. And if you’ve been denied 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.
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.
The post What’s Involved in the Credit Check Process? appeared first on Wise Loan.
Frequently Asked Questions
How do Payday loans work?
The payday loan industry is one of the fastest-growing finance sectors, as they are often used for short-term financial emergencies.
Payday loans are typically offered at interest rates of 300% to customers who apply. The average customer receives $300 to $500.
Payday loans have been around since the 1980s, but due to recent government regulations, lenders must now check customers’ credit scores, income, and employment status before granting them access to cash.
They should also check for any outstanding debts.
Lenders may request collateral from borrowers if these conditions aren’t met.
This could include items such as car titles, furniture, and jewelry.
As well as this, most people applying for a payday loan are required to provide two forms of ID when filling out the application form. This includes proof that you are located in the country and details about your bank account.
Many payday loan companies will also ask applicants to sign documents that agree not to sue their company if they default.
There are many reasons that people may need money quickly.
- Unexpected bills – If your medical bills suddenly become overwhelming, you may be eligible to borrow money for future wages.
- Broken appliance – If the washing machine is not working properly, you may have to borrow money to purchase a new model.
- Unexpected expense: Perhaps you’ve been charged with traffic tickets or parking tickets. You need to borrow money to get out of this mess.
- A holiday – Maybe you want to go on holiday but haven’t saved enough money. This is when you will need to borrow money form a lender.
- Unpaid bills can include rent, council tax, utility payments, and mortgage repayments.
- Car repairs – There are times when accidents can happen and you will need to borrow money in order to repair the damage to your vehicle.
- Bad luck – Maybe you won the lottery jackpot, but didn’t realize until it was too late.
It’s worth noting that payday loans are often referred to as ‘cash advances ‘because they allow you to borrow money by taking out a loan against your next paycheck.
This is not always a good idea as there are risks involved.
These include not being able to pay the bill on time or incurring additional fees.
The risk is that the amount you borrow could be greater than what you earn over the course a month.
What if you have bad credit and want to get a loan for a short term?
If you are not eligible for a loan, however, it is possible to borrow money from your family and friends.
There are other options available, such as buying and selling items on ebay. These are just a few of the ways people with poor credit repay loans.
If all else fails, check into obtaining a personal loan online at an institution such as www.moneytree.com. This type loans requires no collateral and has higher interest rates.
What is the maximum amount of loan I can get with no credit history?
If you do not have at least $1000 in liquid assets and are available to collateral, then you won’t be eligible for any loan. If you don’t do this, you’ll likely lose your money.
If you have savings or investments you can use to collateralize your loan, you are fine.
This collateral can also be used if your employer provides a 401k program.
Statistics
- Those protections include a cap of 36 percent on the Military Annual Percentage Rate (MAPR) and other limitations on what lenders can charge for payday and other consumer loans. (consumerfinance.gov)
- In California, for example, a payday lender can charge a 14-day APR of 460% for a $100 loan.6 Finance charges on these loans also are a significant factor to consider, as the average fee is $15 per $100 loan.1 (investopedia.com)
- By comparison, APRs on credit cards can range from about 12 percent to about 30 percent. (consumerfinance.gov)
- The loans usually can be rolled over for additional finance charges, and many borrowers—as high as 80% of them—end up as repeat customers.89 (investopedia.com)
- Unlike other personal loans, payday loans often feature interest rates ranging from 391% to 600%. (timesunion.com)
External Links
americanbanker.com
consumerfinance.gov
How To
How to get a low-interest Payday Loan
Payday loans help you manage your finances during times of tight funds. These are short-term loans with small amounts (usually $500 to $1500) that last for one week. After your next payday, the loan plus interest is due back. The annual percentage rate (APR) is determined by how long you borrow the money and what loan type it is. Most payday lenders charge a range of 300% up to 400%. This means if you borrow $1000 for a year at a rate of 400%, you would have to repay $4,000 – this includes any fees charged by the lender. Some companies offer lower APRs (e.g., 200% or 150%). These companies usually require larger down payments which can make it more difficult for them to qualify.
A reputable payday lender is one you can trust to provide a loan. You should check with your bank before you pay the loan if you are having problems with your credit card. Most banks don’t allow you to use their accounts to make payments on another account. Payday loans are not allowed in certain states due to state laws.
You must understand the repayment schedule before you agree to take out a loan. You should read the entire document and ask questions if it is unclear. Do not rely on others to explain everything, especially salespeople who might lie to you in order to close the deal. For information about the rules and regulations applicable to payday lending, visit www.paydayloanadvocates.org.
A cash advance is a loan that allows you to borrow money for longer periods of time than your salary. These loans have a lower interest rate than payday loans and usually last longer. Many also use them to cover unexpected expenses like medical bills or car repairs.
The online payday industry is not regulated by the federal government. It hasn’t done so in years. Since several months, the Consumer Finance Protection Bureau has tried to clamp down on payday lenders. The bureau wants standards to be established for all payday lenders. However, no one has yet to offer input. Only two groups, the American Bankers Association & the National Community Reinvestment Coalition have yet to respond. Both groups affirm their support for regulation. They want to limit the regulation’s scope. They argue that setting different standards for payday lenders would be confusing to consumers and burdensome to businesses.
The Federal Trade Commission says that payday loans are acceptable if used responsibly. The Federal Trade Commission states that payday loans are acceptable if used responsibly. Additionally, you cannot already owe a payday loan provider money, nor should you currently be behind on other obligations. A proof of identity and residency will be required, along with a rent receipt or utility bill.
Working in the financial sector is one of my favourite things. I love learning new ways that can improve my financial life. I love to find creative ways of saving money and getting ahead financially. Mint was a great app that I discovered around two years ago. Over the years I have tried many apps, but none has kept my attention as well as Mint. Here’s why…
These loans can be difficult to obtain and extremely costly. The annual percentage rate (APR) for payday loans can range from 400 to 1,000 percent. The APY for $100 is 800%. You’ll be paying $128 in fees. According to some estimates, the average payday loan holder will pay between $300-$500 in fees each year.
A poor credit history can make it difficult to get a loan. Although a lender may grant you a loan with bad credit, you might default on the loan. This could lead to higher interest rate and even a lawsuit by the lender. According to law, lenders must report to credit reporting agency any lawsuits brought against borrowers.
You might think that because you’re getting paid next week, there won’t be any consequences for missing your payment. You’re wrong! Depending on how long you miss payments, this could cause severe damage to your credit score. Late charges and collection activity could be triggered if you fail to make your minimum monthly payments for 30 or more days. You may receive letters from collection agencies threatening legal action if they don’t get paid. You could be sued civilly if you ignore these letters
Make sure you fully understand the terms of any unsecured consolidation loan you sign up for. For example, some may charge additional fees for paying off your outstanding debts early or extending your repayment period. Compare all of your options to ensure you are not being taken advantage. Look for lenders that offer flexible repayment terms such as extended payment periods.
There is no one-size-fits-all solution for consolidating debt, so you’d want to consider all your options. Talk to a professional credit counselor first to determine which options are best for you. A nonprofit credit counseling agency can help you consolidate your debt, often at a lower rate than commercial companies. You can also check out our list if the top 10 most effective debt management software programs for better managing your finances.
The first thing to do is establish a budget. You should make sure that you have enough money to cover the amount of loan you are planning on borrowing. It doesn’t really matter if you borrow $1,000 or 10,000 – you still have to budget for it. Include all of your current expenses such as your car payment and phone bill. Don’t forget to include your savings goal, too. Once you know the source of extra cash, you can look for financing sources.
I am not saying we shouldn’t ever lend money. But before lending anyone money, you must ask them a few questions: How many years has he been working? What is his average salary? Does he live paycheck to paycheck? Does he have any other job ideas? These are important questions you should ask him. I was delighted to have been approved for my very first home. The down payment made me nervous. I decided to go back to school in order to finish my degree. However, since I had no student loans, I didn’t have to put anything down on the house. Instead, I paid 3% of the purchase cost each month until I paid it off. I also purchased a mattress. I have not borrowed any money to buy a house since then. I feel confident in my decision.
