How a Credit Check Can Affect Your Financial Future (and How to ...

We all know (or should know) that when we apply for a car loan, a credit card account, or a lease on a new apartment, the company reviewing our application will check our credit. What many people don't realize, however, is that these credit checks can have a negative impact on our credit score and there are different types with different levels of severity. Here's a look at how the three main types can affect you and what you can do to mitigate any harmful consequences.

When Do Companies and Organizations Run Credit Checks?

Each of the 3 big credit bureaus?Transunion, Experian, and Equifax?allow organizations (mostly financial institutions) to check your credit history and other personal data in order to make decisions like whether to:

• Give you the keys to a new home or apartment (or a sweet ride)
• Underwrite an insurance policy in your name
• Do business with you
• Employ you

Companies can also legally check your credit when attempting to recoup debts that you owe.

What Are the Different Kinds of Credit Checks?

There are 3 types of credit inquiries, and it is important to know the difference between them because they can have drastically different effects on your financial life:

Hard Inquiries

Hard inquiries are usually limited to financial institutions and are used for major financial decisions like taking out a home loan or student loan. They're also known as a "full report check" or "regular check."

How They Affect You

Hard inquiries are the most harmful of all, because they are used to calculate your overall credit score and can be interpreted as an indicator that you are in a bad financial situation or in need of financial resources. Points are taken off of your credit score.

Who They're Usually For

Hard credit checks are most often conducted by banks and other large financial institutions.

Soft Inquiries

Soft inquiries, or "account reviews," are used to get a quick overview of someone's financial situation, but they can occasionally be used more regularly to monitor a person's credit situation without negatively impacting their credit score. Soft inquiries can show a company an aggregate number of hard and soft prior credit checks on your account, but not who made them.

How They Affect You

Soft inquiries aren't typically used to calculate your credit score but they do show up on your full report so depending on what company made the inquiry they may indicate (indirectly) that something isn't quite right.

Who They're Usually For

Landlords, employers, insurance companies, and marketing companies.

Marketing Inquiries

Marketing inquiries, which are also known as "promotion reviews" or "qualification checks," are usually used to sell or qualify you for financial products. You may receive an offer for a loan or other financial service after this type of inquiry.

How They Affect You

This inquiry type doesn't show up on your full report unless you request it yourself (i.e. if you request a full report from a bureau, you may see a section labeled "Recent Credit Inquiries" that shows these inquiries as well as who made them). But others who do soft or hard credit checks on you would never see these and they are never used to calculate your credit score.

Who They're Usually For

Marketing companies, banks, credit card companies, and others.

Now that you know how to identify these three types of credit inquiries and the various ways they can affect your financial future, you can?

Take Action to Protect Yourself

Here are a few tips to keep in mind with regard to credit checks:

1. Don't panic. At most, credit checks can account for 10% of the calculation of your credit score. If you use the information provided here, your credit score shouldn't suffer significantly because of credit checks.
2. Be aware and proactive. If you know or have reason to believe that companies are running credit checks on you, try to find out which type of credit check it is and if necessary, look at your credit report to make sure nothing looks fishy. As mentioned in my previous post, you can use annualcreditreport.com once a year to check for inconsistencies or errors. (Pay particular attention to the inquiries section of each report.) Knowledge is truly power?and money?in this case!
3. Correct mistakes. You can always call companies to correct blatant mistakes that you find. You'll probably have to be tenacious, but it's worth it.
4. Know the rules. This is especially important for those who are looking into purchasing a new car or house. Most people rightly look for the best rates on mortgage and auto loans, and fortunately this is only displayed as one credit inquiry ? as long as these take place within a contracted period of time, usually about 45 days.

Your data is extremely valuable ? to say the least ? and a lot of people want to use it in order to make more informed decisions about your likelihood of getting into financial trouble. That's why it is important to make sure your information is always accurate, and to make sure that you know the rules about credit inquiries and how they can impact your financial future.

If you want to learn more about your credit, be sure to check out how you can proactively managing your credit reputation.

Photo by Ivelin Radkov (Shutterstock)

Rod Ebrahimi is a longtime Lifehacker fanatic and co-founder at ReadyForZero.com. Rod was inspired to write this after having far too many conversations with friends about it; he plans to send them this link instead. Follow him at @innovatebig. Special thanks to Benjamin Feldman for reviewing and helping with the research for this post.

Source: http://lifehacker.com/5827613/how-a-credit-check-can-affect-your-financial-future-and-how-to-protect-it

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