Credit checks are usually necessary when borrowing money. Some risky, high-interest loans such as payday loans and car title loans do not require credit checks. However, standard loans from banks, credit unions and other traditional lenders virtually always require a credit check. The lender will review information on the credit report and the credit score.
Credit Scores
Credit scores are three-digit numbers ranging from 350 to 850. Scores of 720 or higher are outstanding and usually lead to quick approval if the borrower meets other standards for income and employment. Scores in the 700s or higher are preferred by lenders, but credit is available at almost any credit score, depending on the lender's guidelines. However, the lower the score, the higher the interest rate, typically. Home mortgages are widely available for credit scores of 620 or higher, and the Federal Housing Administration has loan programs for people with even lower scores.
Credit Reports
Credit reports provide detailed information about a borrower's credit history, including the number of accounts and the type of accounts, such as credit cards, installment loans, mortgages, signature loans and automobile loans. The payment history for each loan is presented along with balances, credit limits and the number of times the loan was paid late. Special notations are also included, such as accounts that were closed because of nonpayment and listed as charged-off and placed with debt collection agencies. Court information such as bankruptcies and monetary judgments are also listed.
Free Reports
People can check their credit reports for free by viewing and printing copies from Annual Credit Report. The website is authorized by the Federal Trade Commission to offer free credit reports under the terms of the Fair Credit Reporting Act -- a federal law. Three free credit reports are available each year, including one from each of the major credit reporting bureaus -- TransUnion, Equifax and Experian. Credit scores are available separately, for a fee, by following information listed on the credit reports.
Regular Reviews
Creditors checking a borrower's credit for the first time must obtain permission from the borrower. However, once an account is open, the creditor can regularly review the borrower's credit to make decisions about increasing or reducing credit lines on unsecured accounts such as credit cards. The creditor can also use the reviews to consider the borrower for other credit offers.
Employment
Credit checks can also factor into the hiring process for jobs. Some employers, including insurance companies, financial services firms and banks check credit as a condition of employment. Employers checking for credit may search only for serious credit problems such as bankruptcies or judgments. People applying for credit or a job should first check their credit reports for errors. The Fair Credit Reporting Act forces credit bureaus to correct mistakes after being notified by the consumer.
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