Background check vs credit check explained

By Matt Mayerle
Modified on May 8, 2023

If you’ve ever applied for an apartment or a new job, you’ve likely been the subject of a background check. And, if you have applied for a credit card or a loan, you have also been the subject of a credit check. There are circumstances where a background check and a credit check will be run simultaneously.

Credit checks and background checks are done in a lot of the same situations by the same people. Since there is so much overlap, consumers can often get confused between them. So, what is the difference between a background check and a credit check?

What’s Included In a Background Check?

A background check will help confirm that the applicant is who they claim to be with identifying information. Personal identifying details can help the potential employer or landlord running the background check know that you are not lying about your identity. 

There are various background check services that may provide different information. However, all of them will include the person’s criminal record, which is the primary purpose of a background check. Some services will provide information on the applicant’s educational degrees, employment history, driving record, and important civil records.

Prospective employers and landlords may run a background check on potential employees or tenants to ensure that there are no criminal records that are of concern. Put most simply, a criminal background check is meant to ensure the applicant’s good character.

Criminal History

A criminal history check may be a necessary step in the hiring process for specific sensitive jobs or even by potential employers looking to create a particular type of workplace environment. Background checks allow landlords to maintain safe apartment complexes and neighborhoods.

You may have already answered questions about your criminal history on the apartment or job application. Background checks make fact-checking possible so they can be sure all the information you have provided is accurate. 

Can Background Checks Include Your Credit? 

Some background checks include credit report information in the results. However, a full credit check is far more comprehensive when done independently. So in cases when both a Credit check and background check are needed, they will often both be performed simultaneously to get all the information that can be provided by both services.

What’s Included In a Credit Check?

Credit or financial checks are far more commonly performed than background checks, as they are necessary every time you apply for new credit. Credit checks pull your credit report to see the overall state of your finances. Your credit report can confirm that you are financially responsible or show signs of possible financial distress. 

Employers, lenders, credit card companies, and landlords will pull your credit report so they can get an idea of your creditworthiness and reliability. All the credit information included on your report will allow these companies to make an informed decision.

Credit Report

You have three credit reports; one from each of the three major credit bureaus. Which credit bureau the creditor pulls your report from – TransUnion, Experian, and Equifax – depends on their preference which is why all three credit reports matter. 

Each of your credit reports will have the same basic financial information about your credit history. Your credit report will look something like this:

Personal Details

Each credit report will include personal information that can tie you to your report. These details aren’t used to calculate your credit score but instead used to ensure that whoever is checking your credit gets the right report. Details will include your full name, date of birth, Social Security Number, previous and current addresses, phone numbers, and employer information.

Credit Accounts

Next, details on all of your past and current credit accounts will appear on your credit report. This information will include the type of account (student loan, auto loan, mortgage, cash advance, credit card, etc.), the date the account started, the loan amount or credit limit, the account balance, and the payment history.

Credit Inquiries

Whenever credit checks are performed, they show up on your credit report as hard inquiries. Too many hard credit inquiries within a short period of time can negatively affect the calculation of your credit scores. Hard inquiries can stay on your credit file for up to two years, but checking your own credit or being pre-approved won’t harm your credit as those are considered soft inquiries.  

Public Record & Collections

Credit bureaus will also include public records from state and county courts that relate to credit issues. The records that are likely to appear in a consumer’s credit report include foreclosures, repossessions, and bankruptcy filings. The account may be passed off to a debt collection agency when you have too many missed payments. Collection agencies will report your past due accounts and show up as derogatory marks on your credit report. 

Credit Score

Your credit score utilizes five components of information that have been included in your credit report. These five categories each account for a percentage in calculating the three-digit credit score heavily relied upon in credit checks:

  • Payment History – 35% 

A history of on-time payments is excellent for your credit, whereas too many missing or late payments will hurt your credit.

  • Amount Owed – 30% 

Your credit utilization rate is the total amount you owe compared to your available credit. More available credit and a lower credit utilization rate are considered responsible credit usage. 

  • Age of Credit History – 15% 

The oldest, youngest, and the average age of all your credit accounts is an essential factor in determining your credit score. Having an older and longer established credit history is better for your credit score. 

  • Credit Mix – 10% 

The variety of account types is your credit mix. You want to aim to have a healthy combination of various types of credit rather than just one. 

  • New Credit – 10% 

Hard inquiries and brand new accounts will count for 10% of your calculation. This will include the credit checks requested by a landlord or potential employer.  

Why Do Employers Check Your Credit?

Landlords and lenders checking your credit report makes sense, but you might be unsure what purpose credit checks serve for employment purposes. Why would employers need to perform credit checks? 

When employers pull reports for job applications, they usually don’t check the applicant’s credit history in full but instead receive a modified credit report instead. Employers will not see your credit score but rather an overview of your debt and payment history. 

Some reasons why employers find this necessary to do include: 

  • Some employment might require a security clearance or contain sensitive data. A check might be performed for security purposes so that the employer can be sure you are trustworthy.
  • Small businesses may want to ensure that you are reliable in handling your own finances. 
  • If you have excessive debt, this could be a red flag to employers that you are more likely to commit fraud or theft. 

Not all employers will be checking your credit for the same reason, but it’s a good idea to be positive that your credit report is in good shape in case you apply for a job that requires a credit check.

Tips For Improving Your Credit History

To prepare yourself for credit history checks, there are several helpful actions you can take to boost your score and clean up your report. Here are a couple of the things you can do to make a positive impact on your credit report:

Check Your Own Credit Report Regularly

Thanks to the fair credit reporting act, every person is entitled to a free credit score and report from each credit bureau once a year. Checking the free copy of your own credit report every year is one of the best things you can do for optimal financial health. It will allow you to catch inaccuracies quickly and narrow down what improvements you need to make.

Decrease Your Credit Utilization Rate

If you don’t have much available credit, pay down a significant amount of your debt to improve your credit utilization ratio. Most financial experts advise consumers to have a credit utilization under 30% for a good FICO score. 

Take a Break From Apply for New Financial Products

Each time a lender, creditor, employer, or landlord checks your credit, it results in a hard inquiry on your report. As mentioned above, too many hard inquiries can give the appearance of financial distress. If you can, don’t apply for a new financial product for the time being to allow your credit report some time to settle. Focus on improving your payment history by making your monthly payments on time instead. 

Credit and Background Checks: What’s the Difference? | Fiscal Tiger
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