Credit File

A person’s credit file is a collective record of personal, financial and public information regarding borrowed funds. When a loan or credit account is opened, banks and lenders report this information to credit bureaus. The bureaus then compile the information into a credit report. Companies can then ask to review the report in a process called an inquiry when considering that person for financial arrangements or services.
Information that goes into a credit report:

• Identity Verification
  • All names or titles that a person has gone by
  • Date of Birth
  • Social Security Number
  • Current and past contact information
    • Phone numbers
    • Addresses
• Credit History
  • Past and present credit accounts
  • Type of account
  • Name of creditor or lender
  • Opening and closing dates
  • Credit limits or loan amounts
  • Current balance of each account
  • Debt repayments
• Debt collection referrals
  • Liens
  • Court judgments
  • Foreclosure/bankruptcy
• Previous Inquiries

The Credit Bureaus

There are three authoritative credit bureaus to which companies are obliged to report. However, the three bureaus process independently of each other, and so do not work with the exact same information at the same time. Because of this, credit reports can vary between each bureau, and subsequently so will their estimated credit scores.

Credit Score

A credit score is a summary of a person’s credit report. The data is graded on a numerical scale, weighted by information most relevant to the arrangement or service for which a person is applying. This gives an inquiring lender an idea of how risky an investment this credit account would be and adjust offers accordingly.
There are several types of scores, but the two used in most everyday operations are the FICO and VantageScore models, both of which are very similar.

Inquiries and Credit Checks

A credit check is when any entity requests a person’s credit report from a credit bureau. This can be a financial institution, lender, a company, landlord, employer, or oneself. The information can be used to verify a person’s identity, observe any public records, and principally to check their financial status. Depending on the purpose and qualifications of the requestor, credit checks are split into two categories: hard inquiries and soft inquiries.

• Hard Inquiries
  • Hard Inquiries are performed by lenders or service providers when considering applications.
  • While the next report will not show if previous applications were accepted or rejected, hard inquiries can lower a credit score because the potential granting of credit by the inquirer would also increase the debt in the applicant’s file.
    • If accepted, the lowering of the score can be minimized by responsibly paying off the loan.
    • If rejected, the credit score will not be directly affected, but the request for credit will still be visible to future inquirers. Lenders are required to explain their decision for rejection.
    • Knowing the reason why a person was rejected can help prevent future hard inquiries, too many of which will negatively affect consideration for new debt.
  • Hard Inquiries are only considered for about a year. If made within the same month, multiple hard inquiries for the same type of credit may simply be reported as a single one.
• Soft Inquiries
  • Soft Inquiries are performed when credit checks are made without an application for funds or credit. These involve checks from current lenders, checks for qualifications for products or employment, or when checking one’s own credit. These types of checks will not affect a credit score.
  • Credit companies often use soft-inquiry data when sending promotional offers where the customer is “pre-approved” or “prequalified”. These inquiries do not replace the hard inquiry that needs to be done if the customer actually applies.