Credit checks: A quick guide

Quick insights

• There are two types of credit checks—hard and soft—and they both provide insight into your creditworthiness.
• There are several reasons why credit checks are performed, such as lenders who want to assess your creditworthiness as part of a loan application process.
• Hard credit checks can temporarily decrease your credit score, while soft credit checks have no impact on your score.

Credit checks are a common practice in the realm of financial services. If you’ve ever applied for a line of credit, you’ve likely experienced a credit check. But how do credit checks impact you and your credit? Let’s answer these questions and more below.

What is a credit check?

A credit check occurs when someone (typically a lender, landlord or employer) wants to review your credit history and profile. Reviewing your credit can help these parties determine your eligibility for loans, rental agreements and more. Let’s breakdown some of the various purposes of credit checks below.

Assessing creditworthiness

Credit checks help evaluate your creditworthiness, a factor that lenders and other entities consider when determining your loan eligibility and terms. Creditworthiness is your ability to repay your debts in a timely manner. When someone runs a credit check, the information obtained helps determine the likelihood of you repaying your debts or fulfilling financial obligations.

Risk mitigation

Credit checks can be an essential part of risk management for lenders and other entities. By reviewing your credit history, an entity can assess the risk of entering into a financial agreement with you. This helps them make informed decisions and consider the chances of any financial losses.

Loan approvals

Lenders use credit checks to help determine whether to approve your application for a loan or other line of credit. Credit checks can also assist them with determining your terms, such as annual percentage rates (APRs), credit limits and more.

Rental applications

If you’re looking to rent your next apartment or home, your landlord may run a credit check on you and other prospective tenants. This helps the landlord determine if a future tenant could be responsible with their rental payments. Positive credit history, for example, could increase your chances of a landlord accepting your rental application over someone with a poor credit history.

Employment screening

Some employers may conduct credit checks as part of their hiring process. This can help an employer evaluate your financial responsibility.

Types of credit checks

Credit checks come in two different forms—soft credit checks and hard credit checks. Below we’ll distinguish between these two.

Soft credit checks

Soft credit checks—also known as soft pulls or soft inquiries—do not impact your credit score. They provide less information than a hard credit check, but do provide a small snapshot of a person’s credit history, including a summary of their credit accounts and payment history. It may include other information such as name, address and employment history.

Soft credit checks are typically performed for the following reasons:

• Monitoring personal credit. If you are curious about where your credit stands but don’t want to hurt your credit score, you can run a soft credit check.
• Prequalification offers. Lenders may run a soft credit check to see if you would qualify for a line of credit. If you do, they will probably send you an offer. However, this does not guarantee that you will finally get approved after the formal approval process is conducted.
• Insurance premiums. Some insurance companies may run a soft credit check to help determine your premiums.
• Employee background checks. Some employers may run a soft credit check as part of your background check during the job application process.

Hard credit checks

Hard credit checks—also known as hard pulls or hard inquiries—temporarily decrease your credit score by a few points. Hard credit checks are a part of the formal application process for a line of credit, such as credit cards, loans and more. They provide more robust information to a lender than a soft credit check. They include credit scores and a credit report that details your credit behavior, with account balances, negative items (i.e., late payments or collections) and other relevant credit information.

Hard credit checks are typically performed for the following reasons:

• Loan applications. Whenever you apply for a loan, such as a mortgage or an auto loan, your potential lender runs a hard credit check to determine your eligibility, credit limit rates and more.
• Credit card applications. Anytime you apply for a credit card, your lender will likely run a hard credit check to help determine your eligibility, credit limit, interest rates and other terms.
• Credit limit increase. If you request to increase your credit limit on a credit card or loan, your lender may run a hard credit check prior to determining your eligibility for the increase.
• Rental applications. Landlords may run a hard credit check to see if you are responsible with your payments in order to judge if you can make your rental payments on time.

Who performs credit checks?

Those who perform credit checks include, but are not limited to:

• Financial institutions and lenders
• Landlords and property management companies
• Employers and/or third-party background check agencies
• Yourself (soft credit checks)

How to prepare for a credit check

Whether you’re about to get a soft or a hard credit check performed, it’s beneficial to put your best foot forward. Presenting a healthy credit profile can help you get approved for lines of credit and get access to more favorable terms.

Some ways you can prepare for a credit check include, but are not limited to:

• Review your credit report and credit score. One way you can do this is by enrolling in Chase Credit Journey^®, a free online tool anyone, including non-Chase cardmembers, can use. You can use this tool to view your credit score (without affecting it) as well as see your free credit report provided by Experian™.
• Look for errors or inaccuracies in your credit report. Correcting these items by reporting them to the credit bureau(s) can help capture a more accurate representation of your credit health.
• Consistently pay bills on time. By making regular, on-time payments, you can improve your payment history, which will reflect positively in your credit report and credit score.
• Lower your credit utilization ratio. This ratio is the amount of credit you use against your total available credit. Lowering this ratio to about 30% or less can help improve your credit score.

Remember, anytime there is a hard credit check run, your credit score temporarily decreases. That’s why it may be helpful to avoid applying for several lines of credit within short periods of time.

In conclusion

Hard and soft credit checks are commonly performed. When you are aware of what they are and if they can affect your credit score, you can make more informed financial decisions. Hard credit checks can hurt your credit score temporarily, but are a necessary part of a credit application process. Soft credit checks, on the other hand, can provide a small snapshot of your credit health without hurting your credit score. They are both helpful tools to assist with determining your creditworthiness.