You might already know that credit checks are used in many aspects of our lives.
Not only are they used to decide if you’ll be approved for a mortgage or car finance, but they also help determine what interest rate you’ll pay on a loan or credit card.
If that’s not enough, they are used by employers, landlords and even utility companies.
On top of this, credit checks can impact your credit score.
So if you’re looking to learn more about credit checks and how they affect you, you’ll love this guide.
What are credit checks?
A credit check is a request to see the information on your credit report.
Your credit report contains a record of your financial history, including whether you pay your bills on time, missed payments, debts sent to collection agencies, court decisions, public records and inquiries from lenders.
The information in your credit report is used to calculate your credit score.
Companies perform credit checks for different reasons, but the main reason is to understand your creditworthiness when applying for credit, such as a loan, mortgage or credit card.
By doing so, they can predict if you will repay the money you borrow and make payments on time.
Credit checks are not limited to just creditors. Sometimes, credit checks are carried out when you rent a property, apply for a job or request an insurance quote.
Simply put, a credit check is often used to decide on an application that you’ve made.
What can companies see on a credit check?
When a company performs a credit check, they request a copy of your credit report.
Your credit report contains financial information that allows lenders and other organizations to determine your creditworthiness. So, if a lender can see that you have a good track record with borrowing and repaying debts, it’s likely you’ll be accepted for credit.
However, credit checks are carried out for non-credit-related reasons, too, such as identity verification or as part of fraud detection.
Because a credit check allows companies to see your credit report, they’ll be able to see information such as:
- Your name, address and date of birth.
- Your history of employment.
- Your credit history, including your credit accounts, transactions, balances, and missed or late payments.
- Defaulted or closed accounts.
- Debts sent to collection agencies.
- Banking information, including non-sufficient funds payments.
- Public records, such as court decisions, bankruptcies or liens.
- Inquiries from other companies who’ve previously requested a copy of your credit report.
How do credit checks work?
Credit checks are noted on your credit report as either a hard or soft inquiry.
Inquiries make up 10% of your credit score calculation.
A company will perform a credit check when you apply for credit, and a hard inquiry will occur. Hard inquiries remain on your credit report for three years from the inquiry date, but according to TransUnion, only inquiries from the last twelve months will affect your credit score.
Hard inquiries can lower your credit score, and too many hard inquiries can discourage lenders because it may appear to them that you’re desperately looking for credit.
Soft inquiries occur when a company carries a credit check for purposes other than credit, provided that they have your consent or are allowed to without your permission by law.
Some examples of soft inquiries:
- Existing lenders to add or renew a service, qualify for a promotion, or approve a credit limit increase.
- Identity verification.
- Collecting on a debt.
- Insurance underwriting.
- Employment or tenancy screening.
- Fraud detection and regulation purposes.
- Credit bureaus (credit reporting agencies).
Soft inquiries don’t affect your credit score and are not visible to anyone but you.
When you check your credit score or access your credit report, this is a soft inquiry.
Do credit checks require my consent?
In most provinces, you must give written consent for a company to access your credit report.
Signing a credit application allows the lender to access your credit report when you first apply for credit and while your account is open.
Typically, it also allows the lender to report your information to credit bureaus if you’re approved.
If you live in Nova Scotia, Prince Edward Island or Saskatchewan, consent is not required to check your credit report, but notification must be given.
Lastly, some provinces allow government entities such as judges and police to view parts of your credit report without your consent.
Do credit checks affect my credit score?
Credit checks can indeed affect your credit score.
When a credit application is made, the lender performs a credit check, and it’s noted on your credit report as a hard inquiry.
Each hard inquiry lowers your credit score slightly, but some are more damaging than others.
Credit checks on loans
Although too many hard inquiries can hurt your credit score, multiple applications for the same type of loan (e.g. multiple applications for car loans, mortgages or student loans) made within a short period of time (from 14 to 45 days) are treated as one single inquiry.
These inquiries will appear on your credit report, but only one will affect your credit score.
Credit checks on credit cards
Unfortunately, credit cards are not treated as one inquiry, meaning every credit card application will affect your credit score.
Can a credit check affect employment?
In some sectors like finance and insurance, an employer can perform a credit check before making a formal offer of employment, but they must have your consent before doing so.
Are there credit checks on tenants?
In many provinces and territories in Canada, there are credit checks for rentals.
If you are looking to rent a house or apartment, ask the landlord or rental agent whether they will carry out a tenant credit check.
How do landlords do credit checks?
If the landlord can do a credit check, it means they can request a copy of your credit report to review your previous payment history and check for any negative information.
You might be wondering why a landlord would want to do a credit check? Often, rental income is a substantial source of income for landlords. This is why it’s crucial to choose a reliable tenant.
If you’ve missed payments, had accounts in collections or failed to manage credit responsibly consistently, this will set alarm bells ringing. Your prospective landlord may worry that this will affect your ability to make rent payments on time.
In short: the better your credit score, the more likely you are to be accepted as a tenant.
Credit checks when renting are common, but it’s nothing to fear. Even if you have a poor credit history, there are workarounds.
Before you arrange a viewing of the property, it’s a good idea to check your credit score to determine whether you are likely to be accepted as a tenant.
Alongside a good credit score, your rental history, employment and income are also considered.
To be described as affordable, your monthly rent should account for no more than 30% of your gross income. Many landlords require applicants to adhere to this threshold, or they will reject them. However, always check if there is a requirement such as this.
Rentals with bad credit
If you have bad credit, be honest and explain your situation.
Sometimes, a landlord can disregard poor credit if you seem trustworthy, meet the other requirements, or offer to pay a larger deposit. Having proof of a high income is also beneficial when your credit score isn’t great.
Additionally, be sure to get a reference from your current or previous landlord to show that you are a reliable tenant who pays on time.
If this doesn’t work, the landlord may suggest a guarantor or a co-signer. These terms are often used interchangeably, but there are differences.
What is a guarantor?
A guarantor is someone who will take legal responsibility for rental costs if you are unable to pay. Needless to say, asking someone to be a guarantor involves a great deal of trust, so it’s usually best to ask someone close to you, such as a family member or friend.
To qualify, this person needs to have a good credit score and a steady income. Additionally, they must be able to support you if you can’t make your rent payments.
If you have poor credit or thin credit history, a landlord may request a guarantor before renting an apartment or house to you.
Guarantors must sign the lease with you, but they are not entitled to live there.
What is a co-signer?
A co-signer is someone who signs the lease with you to help pay the rent. The one big difference from a guarantor is that they can also live in the rented property with tenants’ rights.
In other words: both of you are tenants, and you are equally responsible for paying the rent.
So, if you know someone reliable that needs somewhere to stay, has a stable income and has good credit, then you might want to consider this person as a co-signer.
In many cases, having a co-signer allows you to secure the property, even with a poor credit score. Plus, because you’re sharing the rent, you’ll save money.
Guarantor or co-signer?
So, is a guarantor or co-signer the best choice for you?
Well, if you want to live alone but need someone to secure the lease in case you cannot pay, choose a guarantor.
But if you are comfortable sharing a home with someone, then a co-signer with good credit can often help secure a rental.
Rentals with no credit
If you’ve never used credit before and you’re not looking to move immediately, you should look to build credit before applying for a rental property.
Rentals with no credit check
Renting without a credit check is rare, but occasionally it’s possible if your rental history, employment and income are exceptional.
Aside from this scenario, a credit check is usually required. If you have bad credit, consider a guarantor or co-signer to secure the lease.
How do I check my credit for free?
You can access a free credit report in Canada through the major credit bureaus:
See also: How to check your credit report
Credit checks are routine when you make a credit application or when you want to rent a home, so it’s important to understand the process when you make these important decisions.
Poor credit reduces your chances of being accepted for credit and may result in you having to pay a higher interest rate or being refused altogether.
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