A credit check, also known as a credit inquiry, gives lenders, banks, and service providers access to information pertaining to the financial history of the borrower. This information allows lenders to decide whether they would want to proceed with the loan. It is an indispensable part of the loan process, and lenders require one or more of the borrower’s credit reports that they review to make the decision.
There are three credit bureaus that maintain reports of borrowers, which are Equifax, Experian, and TransUnion, and they usually update these reports once a month. It is this credit report that helps calculate your credit score and provides insights into your creditworthiness.
Running a credit check involves a systematic process, and when you plan to seek a loan, it helps to know how a credit check works, the information it provides lenders, and the steps involved in the credit check. With that said, here’s everything you need to know about credit check and why it is an imperative part of the loan approval process.
What Does a Credit Check Tell You?
Running a credit check is especially crucial as it lets the lenders know about the borrower’s payment habits. Who needs this information? A majority of credit checks are performed by potential landlords, insurance companies, employers, debt collectors, utility service providers, and even government agencies with the help of reliable third-party services. Credit checks result in a detailed report of your credit history, and this information is often the deciding factor for lenders when it comes to disbursing funds.
Things a basic credit check will tell you to include details, such as your payment history, account balances, current and historical credit accounts, and much more. This information tells a lot about how the borrower might repay the loan, making it easier for lenders to make a judgment of the borrower’s credibility. In addition to this, a borrower’s credit report is also a useful way of spotting any fraud early on to avoid issues with repayment after the loan is granted.
All the information present on your credit report is assessed thoroughly, and any incorrect information that’s listed can have a negative impact on the loan approval process. Since a credit report helps lenders understand your qualification odds, you should ensure that it is free of errors by checking and disputing errors to improve your credit history.
What Information is Required to Run a Credit Check?
While running a credit check is a fairly simple process, there are various steps that need to be followed. When you know what information would be required to run a credit check, you can be more prepared for the process. Before you set out to gain access to a potential borrower’s credit report, here are some aspects that you should be familiar with.
It is imperative that you seek permission before you check an individual’s credit as it is against the law to run a credit check on someone else unless you have their verbal or written consent. With that said, you can either ask for a person’s approval verbally, by let them know that you need to run a credit check and if they’re ready to allow you to do the same. If they give their verbal consent, you can go ahead with the process. You can also seek written consent in the form of a contract. The contract should clearly indicate that there is a need to check the person’s credit next to the following words- subject to credit approval. When the individual signs this contract, you can move forward and perform a credit check.
After you have the prospect’s permission, you need to obtain some personal details, such as their full name, prior and current address associated with the credit account, past and current employers listed on the credit application, phone number, and social security number, among other details. Knowing an individual’s social security number is extremely crucial to looking into their credit history.
When you have access to the potential borrower’s personal information, the next step is finding a reliable credit-reporting service. You can easily look for an online service provider, as most credit-reporting agencies get themselves listed online for better accessibility. You can also compare different service providers in terms of the fee and packages. Credit check service providers generally have monthly and yearly plans wherein you can either run unlimited credit checks or a certain number of checks. The package that you opt for should depend on your requirements.
Reasons Why Credit Check is Required to Proceed with Loan
When a credit-reporting service provider performs a credit check, they generally give the credit report a score based on a complete assessment of a range of details. Not only does a credit check help decide whether or not to accept the loan application, but it also helps make several other decisions with respect to the loan when the application is accepted. Here are the top reasons why a credit check is required when assessing an individual who applies for a loan.
To Check Creditworthiness
A credit check gives you a numerical representation of the creditworthiness of the potential borrower. This credit score is an important indicator of the likelihood of the person’s loan approval and the interest rates based on the risk assessment made.
To Assess the Speed of the Application Approval Process
When you have a high credit score, it helps speed up the passage of your loan application through various stages of approval. Since a high credit score indicates that the proof of credibility has been performed and verified, lenders generally go ahead and process the documents quickly and with confidence. Therefore, credit scores based on the credit check is required to assess how swiftly the funds will be disbursed into the borrower’s account to be used.
To Decide Interest Rates
One of the most important aspects that every borrower keeps a close eye on when applying for a loan is the interest rate. One of the factors that have a great impact on the interest rate incurred by a borrower is their credit score. Borrowers with a high credit score have greater liberty to opt for a loan from a lender offering them the most favorable terms and conditions.
When a borrower has some control over their personal loan interest rate, they receive more flexibility in terms of repayment tenure. Therefore, with a greater credit score, a borrower can choose to be debt-free sooner by regulating their interest rates.
A borrower’s credit score also decides the ticket size of their personal loan. A better credit score can qualify a borrower for a higher amount of loan. In addition to this, a good credit score also ensures that an individual’s loan approval process goes through with minimal documentation.
While a credit check is an important part of the loan approval process that helps a lender make the right decision when reviewing a person’s loan application, it also helps a borrower understand their creditworthiness and the amount of loan they would qualify for. However, checking someone’s credit report and having access to their credit score is not as easy. It takes their consent, either verbal or written, to go forward with the credit check process. With that said, both current and potential lenders qualify for running a credit check on borrowers.
In fact, a borrower, like someone needing a loan, can also perform their own credit check and access their payment and another financial history to ensure their credit report is accurate and free of errors. By law, every individual is entitled to run a credit check on themselves once a year with each of the three credit bureaus. Once you know what it takes to run a credit check either on a potential borrower or for yourself, the process is less hassle-free.