How to Define a Credit Check

A credit check is the act of obtaining a credit report. Credit reports provide detailed financial information about an individual, including past financial problems and information about employment history. Consumers can use a credit check to make sure they aren't victims of credit fraud or identity theft, which can harm a credit report by attributing poor behavior to the individual.

Purpose

The purpose of a credit check is to call to attention both good and bad points that make up an individual's financial history. While most of the items included in a credit report pertain to credit or borrowing, other sections cover income, employment and current debt. Credit checks can identify a consumer with a history of late payments or accounts in default. They also note bankruptcies and foreclosures. But they can also confirm a consumer's good credit by noting a history of timely payments and steady employment.

Requirements

There are several situations that may require a credit check. Applying for a major loan is one. Credit card issuers, mortgage lenders and auto loan companies all need to be able to identify customers who pose a higher degree of risk. Landlords also use credit checks to make sure tenants don't have a history of evictions and make enough money to be able to afford rent each month. Potential tenants and loan applicants need to provide basic information, including a name and Social Security Number, for a credit check to proceed. Depending on the institution, there may also be a fee for the credit check.

Credit Report vs. Credit Score

Credit checks result in a credit report, which offers a full list of financial activities in the past as well as the status of current accounts. This is not the same as a credit score, which is a single number that is a part of some credit reports or may be available separately. Credit scores, which range from 300 to 900, synthesize the information in a credit report into a single number for fast access and comparison. Lenders and landlords may use credit scores to determine which applicants should receive the lowest interest rates on a loan or to be allowed to rent a more expensive unit.

Sources

The Federal Trade Commission oversees credit reporting through three private reporting agencies. They are TransUnion, Equifax and Experian. According to the Fair Credit Reporting Act, every consumer is entitled to a free credit report from each of these agencies once a year. Additional reports within a one-year time period, or reports that include a credit score, may incur fees, but basic credit reports are a free way for consumers to monitor their own credit. Other companies that offer credit reporting services do so outside the jurisdiction of the federal government.

Improving Credit

In some cases a credit check may result in an individual being rejected for a loan, asked to pay a higher interest rate or denied an apartment. But credit reports change over time, and a future credit check may result in an improved report and score if the individual in question makes good financial choices. Paying bills on time and contacting lenders to arrange more affordable repayment schedules instead of skipping payments is a good start. Spending within one's means and only taking loans that can be paid back comfortably can also contribute to an improved credit report. Gradually, these positive items will replace negative items on the report.