The Basics of Credit Screening and Evaluation
This article explains the essentials of credit screening, including how credit scores are calculated, who requests them, and what constitutes a good score. It highlights the importance of credit history, debt levels, and inquiries, providing a comprehensive overview of the credit evaluation process for consumers and lenders alike.
What is a credit screening?
Credit screening involves examining your financial background to determine your creditworthiness. This process assesses your credit score, current debts, payment behaviors, and overall financial health.
Purpose of credit screening
Financial institutions perform credit screenings before approving loans, credit cards, or lines of credit to mitigate their risks.
How your credit score is determined
Your credit score is calculated based on several key factors:
35% — Payment history, including punctual payments, missed deadlines, penalties, and foreclosure history.
30% — Debt levels, which consider your debt-to-income ratio, account balances, and repayment amounts.
15% — Length of credit history, based on the average age of your accounts and the oldest account held.
10% — Multiple credit inquiries, which can lower your score if numerous requests occur in a short time, especially for hard pulls. However, inquiries older than a year usually have less impact.
What qualifies as a good credit score?
On a range from 300 to 850, scores above 700 are generally viewed as favorable by lenders, though exact standards can vary slightly among agencies.
Who typically requests a credit screening?
Banks and financial institutions request these checks when you apply for loans, credit cards, or mortgages. Employers might perform a credit check during background verification, especially for roles involving financial responsibilities. Landlords may also run soft inquiries to evaluate potential tenants. Everyone can access a free annual report from the credit bureaus to review their own score and credit history.
