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A Quick Guide to Credit Checks in 2022

The past couple of years showed that daily life can change virtually overnight. With the current level of uncertainty people are facing, financial security has never been more important. Although no one can prepare for every eventuality, having a safety net prepares you for what life is going to throw at you.

Another report here on The Roanoke Star discussed strategies on managing your finances, including paying your debts as early as you can. By doing this, it can help improve your credit status, which in turn will positively influence your financial future.

To evaluate a person’s credit standing, government and private institutions conduct credit checks. They are used for everything from getting insurance to taking out a loan or even securing a new place to rent. You may also request for a check to monitor your financial status.

However the process for credit checks is constantly being updated, so it pays to stay on top of the changes. For this year, the non-profit organization AARP shares that there are revisions involving medical debt, ‘buy now, pay later’ purchases, and payment history. Keeping yourself up to date with the terms will empower you to make better financial decisions.

With that in mind, here are some more important things to know about credit checks:

Three Credit Bureaus

The results of a credit check come in the form of a credit report. There are three bureaus in the US that can provide this document, namely Equifax, TransUnion, and Experian.

The main differences between them are that Equifax has a summary of open and closed accounts; TransUnion has an extensive section for employment data; and Experian shows monthly balance history. Conversely, the data found in reports from all three include personal information, payment history, public records like a tax lien, inquiries such as loan applications, and a space for a 100-word statement in case you have disputes on your credit file.

Two Credit Scoring Model

Your credit report also shows your credit score, which is basically a numerical indicator of your overall standing. It takes into consideration all the information in your file.

The three bureaus follow the scoring model of either FICO or VantageScore, both of which have a score range of 300 to 850. The majority of lending institutions, however, base their approvals on FICO scores. As much as 90% of lenders use this information.

The difference between the two is how they rank other components aside from payment history, which is the biggest factor in establishing your score. FICO puts more emphasis on your credit utilization rate, AKA credit amount you’ve used vs. your limits, as well as how long you’ve had credit. VantageScore places more weight on type of credit and your total balances.

Two Main Types of Checks

When financial entities like credit card firms and insurance companies request for credit checks, they do it through a hard or soft inquiry. A hard check is defined by Upgraded Points as an inquiry that provides all the information in your credit file, including existing loans and any amount that’s pending collection. It’s typically pulled when you send applications, such as a new credit card. The report is requested from one or more of the three credit report providers discussed above.

It’s important to note that one hard inquiry may lower your credit score by up to five points. And if you have over seven of these on your report, your score may decrease by up to 50 points. It signifies that you’ve applied for many different financial products within a short period, which isn’t a good sign for lenders. Regardless of approval or denial, it’s wise to wait before sending another application. In general, three to six months of wait time is acceptable.

A soft check on the other hand provides similar information such as payment history and current balances, although not as extensive as a hard check. Details like bank account numbers aren’t shown.

Unlike the other type, soft checks do not impact your credit score. Because they’re more of a general overview of your credit standing, they can be requested without your permission. One example is when insurance firms share soft inquiries among each other to see if they can provide offers to more prospective clients.

Factors That Don’t Influence Your Standing

Some people have misconceptions about credit checks, such that their reports and scores are affected by other factors like race, religion, gender, marital status, age, education, and political affiliation. This is not true.

Your current income and net worth are also not counted. Remember that credit checks are more about how you manage your finances as opposed to how much money you have in total.

Now that you’re more familiar with credit checks, the next step is to do your planning on how you can maintain a good standing. Check out other reports in our Business Section for other helpful tips.

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