Credit Check Processing: Definition and What It Is
Credit check processing is the act of pulling a borrower's credit report and evaluating the information in it as part of a loan application or another financial review. Lenders use this process to assess whether an applicant is likely to repay a loan based on their history of handling credit.
There are two types of credit checks:
- A hard inquiry (a hard pull) occurs when a lender reviews credit as part of a formal loan application. It is recorded on the credit report and can modestly lower the credit score.
- A soft inquiry occurs during pre-qualification or background checks and does not affect the credit score or appear to other lenders.
Why it Matters
For private student loan refinance applicants, a credit check determines whether a loan is approved, what interest rate is offered, and if a cosigner is required. Federal student loans, with the exception of PLUS Loans, do not need a credit check, which is one reason they are more accessible to those with no credit history.
Borrowers who are rate shopping for a refinance should use soft-pull pre-qualification tools before submitting formal applications. Each formal application triggers a hard inquiry. Multiple hard inquiries in a short window can signal financial distress to future lenders, even if each application was for the same purpose. Most models do treat multiple mortgage or auto loan inquiries within a short window as a single inquiry, but rules vary for student loans. Yrefy's bad credit refinance program works with borrowers whose credit has been affected by delinquency or default.
Example
A borrower applies to five private lenders in the same month to compare refinance rates. Each application triggers a hard inquiry. The borrower's credit score drops slightly with each one. Had they used soft-pull pre-qualification first, they could have narrowed the field to one or two lenders before submitting a formal application, keeping hard inquiries to a minimum.
