Understanding credit checks
What is a credit check?
A credit check is an inquiry to assess your credit score which is a number that is given to you after assessing your current credit, liabilities, payment history and so on.
Why is a credit check done?
A credit check is normally required for a bank or any other financial institution that lends you money or offers you a line of credit to minimise their own risk.
How are credit scores calculated?
A credit score is calculated with priority being assigned to the following components:
35% – payment history including on time payments, delayed payments, penalties paid on delayed payments, foreclosures on loans etc.
30% – debt burden or liabilities – this assessment includes debt to limit ratio, balances in accounts, amounts owed in various accounts, amounts paid as instalments and so on
15% – length of credit history – this is calculated based on the average age of each account you own and the oldest account
10% – repeated requests for credit scores – if a large number of requests are made to check your credit score within a short specified period, it could lower your overall credit score, especially in the context of hard credit checks. However, most hard inquiries do not reflect on your credit score when they are over 12 months old.
What is a good score to pass a credit check?
On a scale that ranges from 300 to 850, given slight variations in the policy of different credit assessment bureaus, a score of 700 and above is considered a good credit score.
Who can request a credit check?
Credit checks are normally requested by a bank where you have sought a loan or a mortgage or by a card issuing bank when you have applied for a credit card. Some employers may also initiate a credit check a part of a routine background assessment to verify the trustworthiness of a potential employee. House owners may also wish to be informed of the reliability of a potential tenant and may also initiate a soft credit inquiry. You are also entitled to a free yearly report on your credit score which the three credit assessment bureaus operating in the country are mandated to provide.