What Are Credit Checks?

By Author: Dennis Scott
Total Articles: 18
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Have you ever applied for a credit card, loan, or hire purchase and wondered exactly what they mean when they say they are doing credit checks? Do you then start to worry about the gas bill that you paid late or the credit card payment you missed last year? These types of things all set the basis for establishing your credit rating, or the credit checks that they are referring to. It's all about how you handle your money and how high the risk is that you will fulfil your financial commitment to the company should they agree to loan you money.

Credit checks are performed through a search. These searches will usually give a sense of your past as well as present financial obligations. They will register any late payments or missed payments as well as showing your outstanding balances and line of credit with each company. Checks usually only go back through six years of details. By considering this information the company will determine whether the risk is low enough for them to loan you money or extend you credit.

The main companies that hold your information and provide credit checks operate in specific ways. They ...
... compile their information from public records as well as from lenders and other financial institutions. The accounts that you have or have had over the past six years will be shown on your report. This gives a clear picture to a potential lender as to what type of credit you have accessed in the past and gives an idea of your spending pattern and history.

A lender will use this information to give you a credit score. You will usually be offered your loan or financing depending on your credit score. This score can also reflect the interest rate that you are offered. It is typical that the higher the risk, the higher the interest rate you are given. So even if your credit score is low, you may still be offered financing but your payments would ultimately be higher over the term of your agreement.

Each lender has their own scale of allowable risk so just because you are denied credit from one company does not necessarily mean you will be turned down by another. Some lenders take more into consideration things such as age, occupation and whether you are a homeowner. They use this information to build a picture and determine your risk factor alongside the previous financial history they obtained from the credit checks.

So next time you are applying for credit and you are asked to consent to a credit check you will have a clearer understanding as to what it entails and why it is done. It is important to remember that every company has their own criteria and if you are turned down by one you will not necessarily be turned down by them all. So don't worry if you get turned down, it could simply be the criteria of that company that has determined the outcome.

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