Credit Report Extractions: Your Complete Guide


Photo courtesy: alexsl/iStock; Asking publishers for money

Credit report inquiries are an integral part of most of our financial lives. A company may want to run one when you’re about to get a new loan or are asking for an increase in your credit card limit. A landlord can do one before deciding to let you rent a property, and employers often do them as part of the background check process when hiring.

But what is a credit report and what does it mean for your personal finances? If you have questions like these, here’s everything you need to know about credit reports, from the different types of reports to the impacts they have on your credit score.

Also known as credit inquiries, credit checks, and credit extractions, credit report extractions involve the act of examining your credit report and, in some cases, your credit score. Essentially, when a credit application is made, the company or person applying for it gets a copy of your credit report. The information that appears on the credit report varies depending on the type of credit application made by the business or individual. The amount of detail differs between request types and whether or not a credit score is provided.

In the simplest sense, lenders and other entities use credit checks to determine how responsible you are when it comes to your finances. Your credit report contains information about your debts and the payments you make on them. Businesses and individuals use information from your credit report to determine whether to lend you money or extend credit in some form. By reviewing your credit report and possibly your score, they can analyze your past behavior to determine if you are a responsible borrower.

However, credit reports can also be part of a background check. This is more common if you are applying for a job that involves some level of financial responsibility. For example, if you work in accounting, are engaged in cash handling, or hold a position of public trust, a credit investigation may be part of the hiring process.

The different types of credit statements

Generally speaking, there are two types of credit reports. First, there are hard credit drawdowns. These are usually done by lenders who assess your level of financial risk. As a result, these jumpers are almost universally part of the process when applying for new credit. However, this is not the only time they occur. For example, a common credit card management technique is to guarantee a credit limit increase to ensure that your credit utilization rate remains low. If you specifically request it, a lender will often make a firm credit application as part of the decision-making process.

Hard credit draws can impact your credit score. Therefore, companies need your permission to perform this type of credit check.

Second, there are soft credit drawdowns. These don’t affect your credit score, so companies can run them without your explicit permission. However, any company that does so needs a legitimate reason to access the information.

If you are shortlisted for credit or loan offers, whether you initiate them or they are initiated on your behalf, indirect credit inquiries are usually involved. Often, you’ll know a loan is about to happen if a lender tells you that you can check your interest rate offer without affecting your credit score.

If you have open credit accounts, your lender may make informal inquiries as part of servicing your account, such as when determining if you are eligible for a credit limit increase. Sometimes employers also do soft credit inquiries as part of a background check.

Who can pull credit reports?

Any company that needs to determine if you have a safe level of financial risk to do business could potentially ask to remove your credit report. The most common example is that of lenders. When you apply for a loan or a credit card, a knock is almost always part of the process.

However, lenders aren’t the only companies that might want to check your report. Landlords often apply for credit to make sure you’re financially responsible and likely to pay rent on time. Some utility companies run them, as do some insurance companies.

There are certain situations in which employers may also apply for credit, often as part of a background check. However, they don’t get the full version of your credit report or score.

It is important to note that before a company can apply for firm credit, it needs your permission. Usually this means you fill out and sign a form related to the sweater, either by hand or digitally. Without it, companies can’t do anything but pull back a little credit, and they need a legitimate reason to do so.

You also have the right to pull your own credit report. Whether you use AnnualCreditReport.com, visit one of the major credit reporting agency sites, or go through MyFICO, checking your own credit report has no bearing on your score. Similarly, credit monitoring services perform credit inquiries to gather necessary information on your behalf, but they do not affect your score. However, this does not mean that further credit applications will not have an impact.

How Credit Reports Impact Your Credit Score

Whether or not a credit report checkout impacts your credit score depends on the type of report. If it is a soft request, there is no impact on your score. However, if it’s a hard draw, you might see a drop in your credit score. The extent of the impact of a hard draw on your credit score and the duration of its effect depends on several factors.

Typically, new credit account inquiries — which lead to tough traction — only make up 10% of your FICO score. A new hard draw initially causes your score to drop. However, if you haven’t had many other inquiries in the last couple of years, the dip usually only lasts a few months. The same can be true if you have multiple hard draws for the same type of loan within 14-45 days of each other, depending on the scoring model.

The reason for the latter is that it lets people shop around for the best deal on mortgages, car loans, student loans, and similar products. However, this generally only applies to loans, not credit cards, so keep that in mind. In these cases, the drop may be as little as 5 points or even less, especially if your credit history is otherwise strong. Moreover, it can only have an impact for a few months at most.

However, if you have many difficult inquiries to complete, apply for multiple credit cards in a relatively short time, or have a less than stellar credit history, the impact could be as high as 10 points per hard draw. It can add up quickly. In this case, inquiries can impact your credit score for up to two years. Since this is the case, it’s always best to avoid unnecessarily stretching your credit.

MORE AT ASKMONEY.COM

Previous FERC tackles credit risk metrics with NOPR, show cause order
Next How do I do a credit score check and get a credit report? Important steps to know