When you apply for certain types of products or services, you may learn that you have to go through a “credit check” before your application can be approved. If you’ve never gone through this process before, you may not fully understand what goes into a credit check or how it affects your outcome.

In a credit check, the business that you apply with uses your credit information to determine the risk of doing business with you.

If you’re applying for a credit card or loan, the bank wants to know whether you’ll make your payments on time or if you’re likely to default. They use your past credit history to make the best guess possible.

Some businesses – particularly banks – access your credit report or credit score or both in their credit check. Other businesses use screening software that analyzes your credit information and returns a rating, from 1 to 9, indicating how likely you are to default on the obligation if you’re approved. The credit check will require at least your name and social security number to pull your credit records. Other information, like your date of birth or address, may be necessary to confirm your identity and ensure the business is accessing the right record.

Who Can Do a Credit Check?

Businesses are only allowed to do a credit check when they have a “permissible purpose” under the Fair Credit Reporting Act. This means that the credit check is related to a credit transaction, employment, insurance underwriting, professional licensing, or other legitimate business need.

Note that prospective employers are only allowed to access your credit report, not your credit score, they can only run credit checks when it’s relevant to the job you’re applying for, and they must get your permission before running a credit check. In some states, businesses are allowed to pass along the cost of the credit check to you.

Different businesses look for different things during a credit check. A credit card issuer will be looking to see how you’ve handled your other credit cards, whether you have high balances on other credit cards or loans and if you have any serious delinquencies. An apartment complex or landlord will look for previous evictions or collections from previous property management companies, foreclosure, or other serious delinquencies.

How Long Does it Take?

Most credit checks only take a few minutes, if not seconds. The business will often know right away whether you’re approved and at what cost. In some instances, the software can’t give a firm decision and a manager or other authorized employee has to manually review your credit information to give you a decision.

Things That Can Hurt Your Credit Check

Here are some of the things that can look bad in a credit check:

• Late payments, debt collections, charged-off accounts, especially if they are recent
• Eviction, foreclosure, repossession or lawsuit judgments
• Bankruptcy
• High credit card and loan balances
• A lot of recent applications for credit
• Limited credit history or no credit history at all
• Debt settlement and credit counseling in some cases

If you have any of these, your application may not be approved. Or, if you are approved, you may have to pay a higher interest rate or pay a security deposit. Timely payments, low balances, and no serious delinquencies or public records looks best during a credit check.

What Happens If You're Denied

Businesses have firm rules about their credit standards. This protects them from problem customers as well as discrimination lawsuits. If you’re denied, you may be able to talk to someone and get an exception, but it depends on what you're applying for. For example, some landlords may allow you to pay a higher security deposit if your credit doesn't meet the minimum standards. You may also be abel to get approved with a cosigner or joint applicant if your credit history isn't good enough to meet the criteria.

If your application is turned down or you’re approved but with less favorable terms, you will have free access to the credit report or score that was used in the decision. Your credit report is a compilation of your credit accounts and your credit score is a numerical summary of your credit information. The business will also send an adverse action letter letting you know the reason or reasons you were denied.

It’s important, if you are denied after a credit check, that you review your credit report to find ensure the information is correct. You have the right to an accurate credit report and you can dispute any errors that appear on your credit report to have them updated or removed.

Be careful about making multiple applications at one time. Each time a business does a credit check on your credit history, a record of it goes on your credit report as a credit inquiry. Too many credit inquiries in a short period of time are harmful to your credit. An exception is made when you're shopping for a mortgage or car loan and make all your applications within a short timeframe.

Preparing for a Credit Check

You can – and should – review your own credit report before making an application that would require a credit check. You can get a free credit report from each of the three credit bureaus once a year through AnnualCreditReport.com (no credit card required). In a few other instances, you may be entitled to an additional free credit report. Certain state laws grant access to an additional free credit report or you may be able to purchase your credit report at a discount. In all other instances, you’ll have to pay the full price to review your credit report. It’s worth the cost to know in advance where you stand before going through a credit check.