A credit check is when a business or individual requests to access your credit report.
Your credit report contains information about your credit history, which they can use to gauge your creditworthiness (the risk of loaning money to you).
In a broader sense, your credit history hints at your ability to manage your finances and honour your contractual agreements.
Credit checks are conducted primarily by organizations that issue loan products, such as banks, credit unions, and online lenders.
Since these businesses put assets at risk every time they lend to a business or individual, they need an objective and effective process to screen applicants.
Naturally, they wish to avoid extending credit to individuals prone to defaulting on their debt.
By scrutinizing your credit report, lenders can garner valuable details that enable them to construct a risk profile on you.
They can then use this data to decide whether to approve or reject your loan application.
Should they choose the former, they can assign an interest rate and terms that properly reflect the level of risk they assume by extending credit to you.
In addition to lenders, employers may request a credit report before they consider hiring you for a particular job.
When examining your credit history, they most likely want to get a sense of how you handle your responsibilities.
Landlords routinely use credit checks in a similar fashion, looking to gauge how responsible you are in terms of making credit payments on time, in addition to seeing that your debt loads will not be a burden in being able to afford rent.
Other organizations that may request a credit check include car dealerships and retailers that offer in-house financing.
A credit check provides them with the information they need to assess the risk of borrowers being able to meet their payment obligations.
How Does a Credit Check Work?
When you apply for a loan, the lender will let you know that they’ll conduct a credit inquiry as part of the approval process.
In most provinces, the lender must obtain your written consent before accessing your credit report.
Once you permit them, the lender will submit a request for a copy of your credit report to either one or both of Canada’s credit reporting agencies: Equifax and TransUnion.
The lender will assess the contents of your credit report, gathering the details they need to determine the risk of issuing you a loan.
Some of the items they’ll examine may include:
- The type of credit products you use
- The date you opened your credit accounts
- The credit limits of each credit product you use
- Your outstanding balance on each account
- Late payments
- Debt sent to collection agencies
- The number of credit checks performed on your credit report
Once they complete their evaluation, they’ll use the information as part of a larger analysis to determine whether you qualify for the loan and at what interest rate and terms.
Did You Know?
Businesses and individuals in Nova Scotia, Prince Edward Island, and Saskatchewan don’t need to obtain your permission to access your credit report. They only need to inform you of their intention to do so.
Soft Credit Checks Explained
An organization will perform a soft credit check to pre-approve you for a financial product, such as a credit card or insurance policy.
It’s also done as part of a periodic review of your credit account to satisfy specific regulatory requirements or assess your eligibility for a new product offer.
If you check your own credit report, credit bureaus consider this a form of a soft inquiry, as well.
Soft credit checks have no impact on your credit score since they’re not performed with the intent to approve or reject a loan application.
As a result, organizations can legally conduct a soft inquiry on your credit report without your consent.
Hard Credit Checks Explained
Lenders conduct a hard credit check when reviewing your credit report to determine whether to approve or reject your loan application.
Potential employers and landlords may also employ a hard credit check before finalizing your employment and tenant contract, respectively.
Unlike soft credit checks, a hard inquiry may impact your credit score.
However, the impact is usually mild and temporary.
Usually, an organization or individual needs your permission before they perform a hard inquiry on your credit report.
Hard credit checks remain on Equifax credit reports for three years and on TransUnion credit reports for two years.
Frequently Asked Questions
- Is a credit check bad?
No. A credit check is often a necessary step in obtaining a loan. Lenders use the information in your credit report to determine your creditworthiness. Without a credit check, it’s next to impossible for them to assess the risk of doing business with you, which means they’ll be more likely to deny your application.
However, too many hard credits checks performed in a brief period isn’t ideal as each negatively impacts your credit score. Also, the presence of numerous hard inquiries may signal to lenders that you’re applying for many credit products at once, which usually isn’t a good sign.
- Why is a credit check important?
A credit check provides insightful financial details that lenders require to assess your eligibility for a loan product. Without one, they miss crucial information required to gauge the risk associated with extending credit to you, which increases the chance of them rejecting your application.