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 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.
Credit reports are managed and generated by credit bureaus, also known as credit reporting agencies. The two major credit bureaus in Canada are Equifax and TransUnion.
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. This helps 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.
What can companies see on a credit check?
When a company performs a credit check, they request a copy of your credit report. If the lender can see that you have a good track record with borrowing and repaying debts, you’ll likely be accepted for credit.
Credit checks are also carried out for non-credit-related reasons, such as identity verification or as part of fraud detection.
A credit check allows companies to see the information on your credit report, 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.
What is a hard credit check in Canada?
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. 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.
What is a soft credit check in Canada?
Soft inquiries occur when a company carries out 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. It allows the lender to report your information to credit bureaus if you are 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 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 (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.
Is there a credit check for employment in Canada?
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 I check my credit for free?
You can access a free credit report in Canada through the major credit bureaus:
Wrapping up
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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