How Does a Credit Check Work?

Why a Credit Check is Done

If you are applying for any type of loan or credit line, the company to which you are applying will do a credit check. The reasons they do this is to find your credit worthiness and to see if you pay your loans on time. Another reason is to see your balance to limit ratio. For example, if you have 4 credit cards and a home equity line of credit and they are all used to the max, you would not be a very good risk even if you are paying the payments on time. Another factor is how many credit cards you have. Insurance companies are now checking credit to determine rates. Even utility and cell phone companies are using the system to determine deposits. Almost anything you apply for will be a reason for checking your credit, including renting a home. You can also check your own credit report to see if there are any discrepancies on it.

How the Credit Check is Done

Any company that issues credit, loans or charge deposits can be linked by computer to the three major credit reporting agencies. There are also companies that will do this for rental companies and small businesses. They run what is called a tri-merge report, which gives them the score from each of the credit reporting agencies and usually use the one in the middle as your score. It can be done in minutes via computer and your loan or line of credit can be approved or declined almost instantly. Your score is determined by a number of factors. Each factor is assigned a point value and points are either added or subtracted according to the action.

Let's say you have a mortgage, two credit cards and a car loan, all of which are paid on time or early each month. You will have points added to your score and won't have any trouble receiving additional credit. However, if you have fifteen credit cards, a mortgage going into foreclosure and a car that has been repossessed , points will be deducted and you will not be able to get any more credit until you clean up the problems that you have. When you are filling out an application, do not lie about your credit. The credit report will show everything. If you have had problems in the past, be upfront with the agent taking the application. Many times companies will take the explanations into consideration and not rely totally on the credit report.

What to Do if The Credit Report is Wrong

If you applied for a loan and you got turned down, they will give you a letter stating you have the right to see the credit report that they used for your determination. It will have an address or addresses from which to receive a copy of the credit report. If there is something on there that is not true then you can write to the credit reporting agency to have it removed. They will probably write back asking for some kind of paperwork to prove your statement. This process can take a little time, but it is well worth it if there is erroneous information on your report. If you have judgements or other bad credit on your report, check how long each lasts. This differs in every state. If a company reported a charge off and it's only allowed to show up for 4 years, then after that 4th year make sure they remove it. You can subscribe to companies that will send you updates on your credit report at certain intervals, or you can write the credit reporting agencies directly and ask them for a copy to be sent to you. You can do this once a year with no charge. The three major reporting agencies are Equifax, TransUnioun and Experian.