Finance 101: The Whiz Kid's Perfect Credit Guide

What are Credit Checks? When companies/employers, check the credit reports and scores of consumers, this is known as a “credit check.” When a credit check happens with one or more of the three major credit bureaus, a “credit inquiry” is created; and shows on the credit report. The inquiry is evidence, to a consumer, that their credit was checked. Consumers must know who checks their credit; so they know that their personal information is not being compromised. A credit inquiry can be either “soft” or “hard.” Consumers need to avoid having too many hard credit inquiries done on them, because they will lower the credit scores. The hard credit inquiries can be viewed by the consumer, any company, or employer that checks the credit in the future. For example, if Ashish applies for a Citibank credit card on February 21st, because he needs credit to buy his girlfriend an engagement ring; Citibank would check his credit that very same day. A hard inquiry credit check, from Citibank, would show on the Equifax credit report of Ashish. In April, Ashish decides to buy a house and applies for a mortgage with Bank of America. Bank of America would check his Equifax credit report and see that in February, Ashish had applied for a Citibank credit card. If in May, Ashish were to apply for an auto loan with Suntrust Bank, then Suntrust would check his credit and see Ashish had applied for a Citibank credit card, in February, and a mortgage with Bank of America in April. Hard Credit Checks Damage Credit The hard credit inquiry stays on credit reports for two years and they suggest that the consumer is seeking to obtain credit; which usually means they are trying to get into debt. This sends a negative message to financial institutions. Too many hard credit inquiries cause financial institutions to look at consumers, with risk. This financial behavior may give the impression that the consumer is financially unstable; because it makes no sense to them, why a consumer would need so much credit. For example, it would be considered very abnormal, to Bank of America, if Ashish had applied for five credit cards, in February. In the eyes of the financial institutions, consumers applying for credit aggressively have no intention of paying back the financial institutions; or are planning on getting into high levels of debt, that they will never be able to pay back. As a result, the financial institutions will have a loss. For such reasons, Ashish needs to make sure companies were not checking his credit without his authorization. It is possible for the same financial institution to make multiple hard inquiry credit checks, on the consumer, as a result of a system glitch. Consumers need to be aware of what is showing up on their credit reports and contact the financial institutions immediately, if they performed multiple credit inquiries for one credit product. Most financial institutions are comfortable with two to three credit checks, with each credit report, of the consumer. Soft credit inquiries are different from hard credit inquiries, because they do not lower credit scores. When consumers check their own credit then it is considered a soft inquiry. Employers Perform Credit Checks Any company or employer can perform a soft credit inquiry, without needing the authorization of a consumer. Usually, when a company performs a hard inquiry credit check; they must get permission from the consumer, before doing so. If a consumer is denied for a job, due to having bad credit; the employer will inform them. On the Human Resources webpage of Seminole State College of Florida; it indicates the requirements for the available jobs and what types of checks will be done. There are many jobs, on the market, that require a soft inquiry credit check on candidates, which want a job. For this reason, do not ever stop paying on bills or declare a bankruptcy or commit to debt settlement. Source: http://www.seminolestate.edu/hr/jobs/?id=101390 Conditions of Employment “The College will conduct various types of background checks which may include, but are not limited to: criminal background, credit check, driver's license check, previous employment and references.” Financial institutions use soft credit checks for Account Reviews; they do soft inquiries, for the purpose of specializing and marketing; credit offers to consumers based on their individual credit histories. Additionally, financial institutions that are already doing business with a consumer periodically perform soft credit check inquiries on the credit reports. They want to make sure a consumer is not being delinquent on any loans, applying for credit aggressively, closing too many credit cards, or building high levels of debt. Such actions suggest, the financial conditions of a consumer are unusual or weak. For this reason, when a credit account is established with a company, their computer system monitors the credit profile, of the consumer, to detect any major changes. If major changes occur, then the financial institution will review the credit account that the consumer has with them; they may close it down, reduce the credit limit, or increase the interest rate. For example, if Michelle is a credit card customer of Capital One; their computer system will monitor her credit profile, for the time she has the credit card open. If Michelle becomes delinquent with the credit card she has with Wells Fargo then Capital One will detect a negative change with her credit profile. They will perform a soft inquiry on her credit reports, and a credit analyst will do an “account review” with the credit card account Michelle has with Capital One. The fact that, Michelle was delinquent on a credit card; suggests she has become financially weak. Capital One will now look at Michelle, with risk, because if Michelle was delinquent with Wells Fargo it is feasible that she will become delinquent with Capital One or stop paying at all. For this reason, Capital One may take an adverse action against Michelle, such as increasing her interest rate. They want to make as much profit as possible for the time Michelle is making her payments in a timely manner. When a financial institution decides to increase the interest rate, on a loan or credit card to the penalty default rate; even when the consumer has never been late with them but with another financial institution, the financial institution is doing what is called universal default. In the case of Michelle, Capital One is doing universal default with her. However, Capital One may even close the account and this will damage the credit profile of Michelle. Departments within the financial institution that usually make such decisions on high risk consumers are called the “portfolio risk department,” “account review department,” or the “credit department.” These departments are safeguards for the financial institution, in the event that the consumer makes poor financial decisions after establishing a credit account. Consumers are expected to always maintain excellent credit in order to keep their accounts open and receive incentives, such as interest rate reductions, credit limit increases, and fee refunds. Insurance and Other Companies That Use Soft Inquiry Credit Checks Insurance and other service related companies usually do soft credit inquiries, because they do not want to provide services to high risk consumers that are unlikely to pay their bill. They not perform hard credit inquiries, because getting a service such as electricity, water, insurance, or a phone is different than getting credit. With credit, a consumer has the ability to purchase anything and so financial institutions must do hard credit inquiries when consumers apply for credit for the purpose of protecting themselves. Hard credit inquiries cost more money, for the service providers, to obtain than soft inquiries and they do not make as much profit as financial institutions do.