In personal finance, most people prioritize taking care of their credit scores and raise considerations about credit checking. Simply put, good credit is vital in determining your financial health and access to a broad range of financial services, which is helpful if you’re working on loans, credit cards, or acquiring investment assets like housing and cars.
This article will cover the essential parts of credit checking and credit scores, what it entails, and how it can affect your financial lifestyle.
Understanding Credit Checking
Credit checking, commonly known as a credit score check or credit inquiry, is a process in which banks, lenders, and landlords assess a client’s creditworthiness. It involves a brief assessment of a person’s credit report and score to evaluate their capacity to manage their obligations and repay debts.
Credit checking exists in most cases where an investment or loan is involved, and based on the results of their credit checks, lenders or landlords reserve the right to decline or approve a lease request or loan, which emphasizes the importance of building a good credit score.
Types of Credit Checking
In credit checking, two types of evaluation can affect your credit score, these are:
1. Soft Pull
Soft pulls or soft inquiries are credit checks that don’t impact a person’s credit score when evaluating their creditworthiness. This happens when you typically check your credit reports, ask a potential employer for background checks, or receive pre-approved credit offers from banks or other establishments.
2. Hard Pull
On the other hand, hard inquiries occur when a lender reviews your credit report as part of their approval process, like real estate, getting another credit card, or a loan. Hard inquiries may harm your credit score. Fortunately, it is only temporary, and you can recover from it through suitable financial activities like paying debts or settling accounts.
Credit Score vs. Credit Checking Reports
You might think that credit scores and credit reports are the same. Although closely related, credit scores are a numerical system that evaluates your creditworthiness. In contrast, a credit report or check is a detailed breakdown of your financial activities.
For example, inside your credit report are your recent credit card transactions, pre-approval processes, and recent financial activities that, in turn, reflect your overall credit score.
Considering the information above, you must understand that you know how to read your reports and understand the reason behind your credit scores. After all, self-checking your credit report is free, and you can manage it before lenders or other financial entities can incur a hard pull.
What Makes Credit Checking Important
Your credit score is a tangible representation of your creditworthiness. In other words, it reports how banks and financial institutions can trust you as a responsible borrower. A stern analysis of your credit activities allows you and your bank to work together in making favorable loan or investment programs.
To give you an idea, here’s how credit checks impact your financial well-being in various ways:
Determining your credit score through a hard pull often determines the interest rate you’ll receive in loans and credit card debts. A higher score can lead to favorable terms and lower interest rates, saving you money.
Financial lenders use credit checks as part of their decision-making process. Depending on whether your score is high or low, it may result in denying your application or approving it and proceeding to a curated loan agreement contract.
In housing, landlords are typically more flexible in accepting would-be tenants. A good credit score approves them of their rental request, while a bad one may either outright deny their application or adjust for a higher security deposit instead. Overall, such flexibilities are unique from one property to another and may depend on the state’s housing regulations.
Not all companies do this, but some employers conduct soft credit checks for background checks, especially for positions involving financial management or handling sensitive accounts. After all, why would they hire someone in a financial position with bad financial credit?
Your credit scores affect your payment terms for insurance premiums, especially for home or auto insurance. A lower credit score may result in higher insurance costs. Fortunately, most insurance companies still offer the same policies, so you’d still get the same benefit whether you have a higher or lower credit score.
Given the importance of credit checks and their significant impact on financial well-being, you must manage your finances. The good thing is that you’re always entitled to do a self-credit check on most banks for free and report inaccuracies before settling down to an investment. Nevertheless, your credit is a fundamental aspect of personal finance, and good standing can help you go through most financial decisions and secure your future.