It might seem like everything these days requires a credit check - a new cell phone, a cable account, an apartment, a new job. In fact, for many Americans, it might seem like even the phrase "credit check" should come with a stack of legal paperwork, but what exactly happens when a business checks credit score and leaves behind a credit inquiry?
You immediately pass or fail The first thing that happens when a credit inquiry takes place is that your credit score is revealed, and most lenders have a system to generate an automatic pass or fail based on their own credit inquiry requirements. Not all companies require a perfect score, so even if your credit score is low, you might still pass if it’s higher than this number.
You pass, and your file is reviewed Maybe you have okay credit, but what does the rest of your file say about you and any potential financial problems you might have? Maybe your car is six payments behind, or your credit card is maxed out. Because credit bureau updates aren't instant, you can have a good credit score but a terrible credit profile which (during a credit inquiry) will tell your lender that ongoing financial problems are going to turn your good score sour. Remember, what your lender is mainly looking at during a credit inquiry is if you do or don’t have large debts or the potential to have large debts (i.e. 3 brand new credit cards with no spending history) as each of these credit surprises can spell problems later on.
You pass the review, and your DTI gets checked During your credit inquiry, a responsible lender will add up the minimum payments on all of your debts including co-signed debts and divide it by your income to get your debt-to-income ratio (DTI). The higher the DTI, the more risk you are, because even if you make $5000 per month, if you owe $4900 you don’t have a lot of wiggle room. Remember, most of the time credit inquiry still relies on the human element, and in order to rule out clients with financial problems, businesses are reviewing you by hand which is why is pays to keep up with your payments and remove unwanted inquiries with the help of Inquiry Busters.