Whether you’re applying for a loan or opening a new credit card account, getting your credit score pulled is usually part of the process. But what do credit checks entail, and why do companies need to see them?
The Open Door Coalition spoke with Rod Griffin, director of consumer education and awareness at Experian, to learn more about what happens during a credit check.
Griffin said to think of your credit score as a grade for your credit history. It helps companies gauge how responsibly you handle borrowed money.
“Lenders and service providers use credit scores as a risk management tool when evaluating applications,” he explained. “A strong credit history enables consumers to obtain credit cards, homes, auto loans and many other valuable credit services and can affect the amount you pay for those services.”
In addition to money lending, your credit report is also used in a variety of other situations to evaluate risk, such as employment checks, apartment rental applications, utilities and cell phone contracts.
Your credit history is unique to you, so the information included in it is personal in nature, such as your name, address, date of birth and Social Security number.
“All variations of the Social Security number reported as belonging to you by your lenders are included on your credit report,” Griffin explained. “This is done to provide a complete and accurate record of the identifying information reported to us. In most instances, social security number variations are the result of transposed digits or mistyped numbers in the lender’s records. They may, however, indicate fraud, so we list them to help protect the consumer.”
Credit reports also list details on your current and past credit accounts, such as the account type, date you opened the account, the loan amount or credit limit, current balance and payment history, but your full credit account numbers are truncated.
Bankruptcy public records accounts that have been turned over to collections are also included on your credit report, as well as a list of inquiries showing who else has requested to view your credit history. Rent, utility and telecom payments are sometimes included, too.
When a lender or service provider pulls your credit, they are looking for factors that determine how risky it is to lend you money or have you as a customer. These elements include your number of late payments, account balances or utilization rate, and the type and age of your accounts.
Your credit score is calculated based on how well you manage these factors over time, said Griffin.
“A good credit score is essential for your financial well-being because it means you will pay less in the form of interest and other fees when you borrow money. If your score is low, it's because your credit history suggests that there's a higher risk that you'll default on a debt.”
“When a lender requests your credit score, it is calculated using the information as it appears in your credit history at that moment,” said Griffin.
But that information changes regularly — and so does your score.
“Individual account information is typically updated by your lenders monthly, but each account on your report may be updated on different days, depending on that creditor's reporting cycle. A new credit score is calculated each time you or a lender requests it, so your credit score can change daily as well,” he explained.
Keep in mind, your credit score may differ slightly depending on which of the credit bureaus — Experian, Equifax or TransUnion — is being used for the check. For example, one agency may receive an update on one of your accounts before the other two, or a lender may choose not to report to all three bureaus. For this reason, it’s important to request a copy of your credit report from each of the three credit reporting companies at least once a year.
“If you check your credit reports and get your credit scores regularly, there should be no surprises when a lender or service provider requests to check your credit. As long as you make your payments on time and keep the balances low on your revolving accounts, your credit scores should reflect that,” said Griffin. “Using credit responsibly and monitoring your credit reports periodically can make having your credit checked a much less intimidating process.”