Can Your Bank Check Your Credit Score?
Discover how banks use your credit information to make financial decisions, from evaluating applications to managing existing accounts.
Banks routinely access credit information for various financial activities. This process helps them understand an individual’s financial behavior and manage potential risks. Understanding the underlying reasons and methods provides clarity on how banks utilize credit data.
When and Why Banks Check Credit
Banks frequently check a customer’s credit during financial interactions to assess risk and make informed decisions. This occurs when individuals apply for new credit products, such as mortgages, auto loans, personal loans, or credit cards. For instance, when seeking a mortgage, a bank evaluates credit to determine eligibility, set interest rates, and assess repayment likelihood. Banks also perform credit checks for certain bank accounts, particularly those offering overdraft protection, though less common for basic checking accounts.
Beyond new applications, banks monitor existing accounts for risk management. This ongoing review helps them identify changes in a customer’s financial health and adjust their risk exposure. The primary reason banks engage in these checks is to evaluate creditworthiness, assessing an individual’s ability and willingness to repay borrowed funds. This is a fundamental part of their lending and account management processes, enabling them to mitigate potential financial losses.
Types of Credit Inquiries
When a bank checks your credit, it performs one of two types of inquiries: a soft inquiry or a hard inquiry. The distinction is important because they affect your credit score differently.
A soft inquiry, sometimes called a “soft pull,” occurs when a person or company checks your credit for informational purposes, not tied to a specific application for new credit. Examples include banks pre-screening individuals for promotional offers, reviewing an existing account, or when you check your own credit score. Soft inquiries do not impact your credit score and may not be visible to other lenders on your credit report.
Conversely, a hard inquiry, or “hard pull,” happens when you formally apply for new credit, such as a loan or a new credit card. This type of inquiry indicates that a lender is evaluating your creditworthiness for that specific purpose. A hard inquiry can temporarily lower your credit score by a few points. The impact is usually minimal and temporary, often recovering within a few months. These inquiries remain on your credit report for up to two years, but their effect typically diminishes after 12 months.
What Banks See on Your Credit Report
When banks access your credit report, they gain a detailed overview of your financial history, which informs their lending decisions. The report contains several key components that illustrate your past and current credit behavior. These elements help banks determine the level of risk associated with extending credit.
Your payment history details whether you have made payments on time across various accounts. It shows if payments were missed and how late they were, such as 30, 60, or 90 days past due. This section provides a clear picture of your reliability as a borrower. The amounts owed, particularly your credit utilization ratio—the amount of credit you are using compared to your total available credit—is another important factor. High utilization can signal increased risk to lenders.
The length of your credit history, including the age of your oldest and newest accounts, also plays a role, as a longer history indicates more experience managing credit. Banks also examine the types of credit you use, such as a mix of revolving credit (like credit cards) and installment loans (like mortgages or auto loans), which demonstrates your ability to handle different financial obligations. Furthermore, the report lists recent credit inquiries, which can indicate if you have applied for multiple new credit accounts in a short period.