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A high-risk personal loan can be a source of funding for people who have a low credit score or no credit history and need to access cash. It is considered “high-risk” because the borrower is seen as more likely to default on the loan. For this reason, the interest rate is likely to be significantly higher than what a borrower with a more creditworthy profile would be offered via a conventional personal loan.

Here, learn the details of high-risk personal loans, their pros and cons, and alternatives if you need a quick infusion of cash.

What Are High-Risk Personal Loans?

High-risk personal loans make cash available to those with a poor credit score or without a credit history. Some points to consider:

•   Most personal loans require a credit score of 580 or higher, but if you have a low credit score (typically between 300 and 579) or lack a robust credit history, you may be able to tap into a high-risk personal loan.

•   These loans can give you access to cash, but they often come with higher interest rates, higher fees, strict repayment terms, and limits on the amount of money you can borrow.

•   While some of these are unsecured personal loans, others may be secured. This means you may be required to put up collateral, or an asset, to be approved for the loan. In this situation, if you default on the loan, the lender can seize your asset.

•   Personal loans typically come with fixed interest rates, and you must repay them in fixed monthly installments over a specified period, usually up to seven years. High-risk personal loans may have much shorter terms, however.

It’s worth noting that personal loans don’t usually have any restrictions on their usage. You could use them to pay for a car repair, travel, credit card debt, a new kitchen appliance, and almost any other legal purchase or service.

Recommended: Personal Loan Glossary

Types of High-Risk Loans

Here are some options you might consider for high-risk personal loans.

High-Risk Unsecured Loan

With this loan, you will not need to put up collateral to obtain funding. Typically, the lender will offer you a lump sum of cash; perhaps up to $10,000. While this may supply a quick cash infusion, keep in mind that the “high risk” cuts both ways. The lender is taking a gamble on you, as the odds of you defaulting may be high. But you are also probably securing a loan at a high interest rate and with significant fees and limitations.

High-Risk Secured Loan

In the case of a high-risk secured loan, you will be required to put up a form of collateral (such as real estate or a savings account) to gain access to funding. If a lender offers you this kind of loan, keep in mind that if you default, you could lose your collateral.

Payday Loan

Payday loans are short-term, high-cost loans, usually due on your next payday. Typically they provide a small amount of money, such as $500, that needs to be repaid within two to four weeks, and are offered online or at retail locations of payday lenders.

Here’s how they often work: You write a post-dated check for the amount borrowed plus fees, and the lender debits the funds from your account on the day the loan is due. Or you might grant the lender permission to pull the funds from your bank account electronically. If you can’t pay off the loan on time, it could roll over with more interest and fees accruing.

Note that these loans can involve an annual percentage rate (APR) of up to an eye-watering 400%. For this reason, they are considered a last resort.

Car Title Loan

Not all states offer them, but a car title loan lender lets you borrow between 25% to 50% of your car’s value, typically starting at $100 with 15- to 30-day repayment periods. In exchange, you put your car up for collateral. This means the lender can take possession of your car if you don’t repay the loan. (In one review, the Consumer Financial Protection Bureau found that one in five borrowers of this kind of funding winds up losing their vehicle.)

Lenders who offer car title loans typically have very low or no credit requirements, and you can get funding fairly quickly, even in a day. They also likely come with extremely steep interest rates, up to 300% APR.

Pawn Shop Loan

With a pawn shop loan, you hand over an item as collateral (such as jewelry, a musical instrument, or a computer), and the pawn shop offers a loan based on the item’s appraised value.

The shop may lend 25% to 60% of the resale value of the item, but note that if you fail to repay the loan, the pawn shop can keep and then sell the item. The pawn shop may give you 30 to 60 days to repay the loan.

Here’s the risky part: The APRs are high, around 200%, and vary based on your state.

Recommended: Using a Personal Loan to Pay Off Credit Card Debt

Figuring Out if You’re a High-Risk Borrower

Here are signs that you would be considered a high-risk borrower by lenders:

•   You have a non-existent or thin credit history, meaning you don’t have a proven record of handling debt responsibly

•   You have a low credit score (generally, below 580)

•   You have made repeated late payments on loans or credit cards

•   You have defaulted on a loan in the past

•   You have a high debt-to-income ratio (DTI); typically, this means your debts add up to more than 35% of your income

•   You are unemployed

•   You have declared bankruptcy in the past seven to 10 years

Each lender will have its own guidelines regarding to whom they lend, how much, and at what rate and fees. It’s therefore important to check with your lender about the requirements for their personal loans and their terms.

Why Choose a High-Risk Loan?

If you have poor credit or no credit and want to borrow money, a high-risk loan may offer you the best (or only) option to access a loan, particularly if you have an urgent need for cash. You can often access high-risk loans with a lower credit score or minimal credit history than you would need to qualify for traditional loans.

You might seek this kind of loan vs. dipping into an emergency fund you just started or into a college or retirement fund. It could help you preserve those assets if, say, you need quick cash for a move.

It’s important to consider both the pros and the cons of these personal loans so you make the right choice about whether to pursue this type of funding.

Disadvantages to High-Risk Loans

High-risk loans come with several downsides, including the following:

•   Higher interest rates and fees: High-risk loans typically have higher APRs and fees, meaning that you’ll pay more over the loan term. An example: Some have a 400% APR vs. the average APR of 12.38% for conventional personal loans as of August 2024. Some people can get caught in a debt cycle of taking out high-risk loans continually (particularly in the case of payday loans).

•   Risking collateral: You may have to put up an asset as collateral for your loan. If you fall behind on payments, you may lose the asset because your lender will seize it.

•   Lower amounts: You may not get to borrow as much as you prefer, because many lenders will only pay out small amounts to high-risk borrowers. For instance, some payday loans max out at $500.

How to Qualify for a High-Risk Personal Loan

Here’s how you might qualify for a personal loan as a high-risk borrower. Personal loan lenders will want you to see that you’ll likely be able to cover a new loan payment. Among other factors, lenders may use your credit score, your income, and your DTI to assess your ability to repay a loan. In terms of a target DTI, lenders like to see you keep it below 35% for a standard personal loan. With a high-risk loan, you may qualify with a significantly higher figure.

Next, you’ll gather the documents, including:

•   Your ID

•   Social Security number

•   Pay stubs

•   W-2 forms

•   Federal income tax forms

•   Bank account statements

You can apply online for a high-risk personal loan in just a few minutes once you have your materials ready. Your lender will let you know if you need to submit more documentation. In most cases, you’ll have a loan decision fairly quickly (some lenders advertise approval in minutes). If approved, you’ll likely have funds within one to three business days.

Alternatives to High-Risk Loans

You can also consider alternatives to high-risk loans, including:

•   Payday alternative loans: Credit unions may offer their members short-term loans as an alternative to payday loans. Payday alternative loans (PALs) are divided into PALs I and PALs II. PALs 1 offer between $200 and $1,000 with a maximum APR of 28%, and one- to six-month repayment terms. PALs II offer up to $2,000, a maximum 28% APR, and one- to 12-month repayment terms.

•   Family or friend loan: Family members or friends may be willing to lend you money. However, ensure that you can repay the loan in a timely manner so you don’t risk damaging the relationship.

•   Get a cosigner: You can approach someone you know who has good credit to become a cosigner on your application to help you qualify for a standard personal loan. Make sure, however, that both parties involved understand that the cosigner is responsible for taking over your monthly payments if you default on repaying the loan. That’s a major commitment on your cosigner’s behalf.

•   Look for “buy now, pay later” offers: These allow you to purchase an item and then pay it off on an installment plan, which may or may not charge interest.

•   Build your credit: Perhaps it seems obvious, but building your credit can play a key role in helping you qualify for more favorable loans in the future. You might work on positively impacting the factors that determine your credit score or meet with a qualified credit counselor to learn strategies.

Recommended: Guide to Personal Loans

The Takeaway

High-risk personal loans can be a source of quick cash for people with a low credit score or a thin credit history. They can be risky for the lender, because there is a fair chance the borrower might default. They can also be risky for the person seeking the money because the interest rate, fees, and other terms may prove very expensive and/or involve potentially losing any collateral that might be put up.

If you are a high-risk borrower, it’s important to fully understand what these loans involve and the downsides if you cannot repay them on time. It may also be wise to review what options exist before you decide to apply for a high-risk personal loan.

If you’re seeking a standard personal loan, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

What is considered a high-risk loan?

High-risk loans are funds offered to individuals who may have bad or no credit. In exchange for accepting a higher-risk applicant, lenders typically charge higher APRs and fees and/or may require the borrower to put up collateral.

What type of bank offers high-risk loans?

Banks typically don’t offer loans to high-risk borrowers, though it may be worth checking with them before moving on to another type of lender. Those who do offer high-risk personal loans could be online lenders or a retail payday loan provider, for example.

What two types of loan should you avoid?

There are several types of loans you may want to avoid if possible, including car title loans and payday loans. Why? You will pay high interest rates which can trap you in a cycle of debt. Also, with a car title loan, you are using an asset as collateral, which means you risk losing your vehicle if you can’t repay the loan on time.

Photo credit: iStock/Eleganza

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q324-008

Whether you’re making home repairs, planning a bucket-list trip, or consolidating debt, getting a $4,000 personal loan can be a flexible solution. As long as you meet the lender’s criteria, the process of applying for a loan is generally straightforward. However, before you apply, it’s a good idea to understand how personal loans work, where to find one, and what they offer.

Read on to learn about the pros and cons of a personal loan for $4,000 and the qualifications you’ll need to meet to get one.

How to Get a $4,000 Personal Loan

Knowing how to apply for a $4,000 personal loan can make the process a lot easier. Here are some steps to help you get the loan that’s right for you.

Check Your Credit

When you apply for a personal loan, lenders will check your creditworthiness, so you’ll want to review your credit report first. You can get a free copy from the three main consumer credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com®.

After you receive your credit reports, read them over closely and report any inaccuracies. Errors could impact your loan terms and chance of getting approved.

Shop Around

Interest rates and terms vary by lender, so shop around and compare your options. Many lenders will let you prequalify first, which gives you a sneak peek at potential interest rates, terms, and fees before you submit your final application. Comparing at least a few different offers can help you find the one that suits your needs and budget.

Apply for the Loan

Once you’ve selected the loan you want, it’s time to apply. Once you send in your application, the lender will do a hard credit check to see how creditworthy you are. You may also be asked to provide certain documents, including:

•   Identification

•   Proof of income

•   Proof of residence

After your application and required documents are in, the waiting game begins. Some lenders may swiftly approve your application and get you the funds in a lump sum — minus any origination fees — in a few hours or days. But if you have a more complicated loan application, you could be waiting a week or more for a decision.

Pros of a $4,000 Personal Loan

There are several benefits to taking out a personal loan. These include:

•   Flexibility. You can use the funds for just about any purpose.

•   Lower interest rates. Personal loan interest rates are often lower than credit card rates.

•   Bad credit eligibility. You may still qualify for a $4,000 loan even with bad credit.

•   Fast approval. Certain lenders offer fast approval, with funds available to you in a matter of hours or days.

Cons of a $4,000 Personal Loan

While personal loans have plenty of selling points, they also come with some drawbacks. Here are ones to keep in mind:

•   High fees. Personal loans can come with fees, such as origination fees ranging from 1% to 8% of the total loan amount.

•   Prepayment penalties. Some lenders charge penalties if you pay off your loan early.

•   Increased debt: A personal loan can add to your debt load, especially if you spend the funds on big-ticket items instead of consolidating high-interest debt.

•   Negative credit impact: When you apply for a personal loan, the lender will perform a hard inquiry. This can cause your credit score to drop slightly, though the dip is temporary.

Recommended: Fee or No Fee? How to Figure Out Which Loan Option Is Right for You

Can You Get a $4,000 Personal Loan With Bad Credit?

As we mentioned, even if you have poor credit or no credit history at all, you might still be able to qualify for a $4,000 loan. If your FICO® Score is lower than 580, it’s considered poor and you’re generally seen as a high-risk borrower.

While there’s no set credit score you need for a personal loan, many lenders prefer that borrowers have a credit score above 580. You can still qualify if you have a lower score, but the terms may not be as favorable. You could be offered loans with higher interest rates and additional fees. And you may be required to put up collateral, such as a car or your home, in order to secure the loan.

How to Compare $4,000 Personal Loans

Personal loans are offered through online lenders, traditional banks, and credit unions. Just like you shop around for the best deal on a big purchase, it’s smart to compare lenders’ rates and terms before you apply.

Here are a few things you’ll want to consider as you review your options.

Fees and Penalties

Some $4,000 personal loans come with fees, while others don’t. Lenders also have different ways of applying these fees. For example, some lenders may include fees in the loan amount, increasing your total debt. Others deduct fees from the loan proceeds, reducing the amount you receive. Be sure to crunch the numbers because they can increase your borrowing costs.

Prequalification

When you apply for a loan, the lender often looks at your credit to help determine the rates and terms you qualify for. This requires a hard inquiry, which can temporarily lower your credit score by up to 10 points. If you prequalify with multiple lenders, you can compare different offers without harming your credit. You might also want to use a personal loan calculator to get a better idea of what your monthly loan payments may be.

Flexibility

What if you face financial difficulties and struggle to pay back the loan? Or if you miss a payment and incur a late fee? Some lenders offer financial protection programs for borrowers, which can give you peace of mind when choosing a $4,000 personal loan.

The Takeaway

A $4,000 personal loan can be a quick way to get money for almost any need. You can get these loans from banks, credit unions, and online lenders. Requirements vary by lender, and each might offer different interest rates and terms. However, having a good credit score typically gets you a better rate.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

How much would monthly payments be on a $4,000 loan?

The amount you’d pay each month for a $4,000 loan depends on the interest rate and loan term. For example, if you had a three-year loan at 12.00% APR, your monthly payment would be around $133. However, with a two-year term at the same rate, the monthly payment would be closer to $188.

What is the interest rate on a $4,000 loan?

According to data from Forbes Advisor, personal loan interest rates can vary widely, though they’re typically between 7.00% and 36.00%. Rates for a three-year loan are generally between 12.00% and 15.00%. But keep in mind that the rate you qualify for depends on your credit score and loan terms.

What credit score do you need for a $4,000 loan?

In order to qualify for a $4,000 personal loan, most lenders typically prefer a credit score above 580. However, borrowers with lower scores may also qualify for a loan depending on the lender’s criteria.

Photo credit: iStock/PeopleImages

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPL-Q324-011

Whether you’re thinking about paying off a debt or mulling over how to increase your credit score — or both — it’s reasonable to ask if paying off debt helps your credit rating. The answer, though, is more complex than a simple yes or no.

Let’s unpack how paying off a debt can either raise or reduce your credit score, depending on the circumstance; how credit scores are calculated; and how managing your credit utilization can give you some control over your credit score.

How Paying Off a Debt Is Connected to Your Credit Score

What affects your credit score is on a lot of people’s mind. Your credit score is determined by five factors, some of which are weighted more than others. Paying off a debt can affect each of these factors in different ways, causing your score to rise or dip. Sometimes changes in two factors can even cancel each other out, leaving your score unchanged. This is why it’s hard to predict how paying off a debt will affect your credit.

A good first step is to find out your credit score. You may be able to get it for free through your bank, credit card issuer, or lender; through Experian; or by signing up for a free money tracker app.

Credit Score Calculation Factors

According to FICO®, a credit rating company, these are the five factors commonly used to calculate your FICO Score:

•   Payment history (timely payments): 35%

•   Amounts owed (credit utilization): 30%

•   Length of credit history: 15%

•   New credit requests: 10%

•   Credit mix (installment versus revolving): 10%

Once FICO’s algorithm calculates your score, a credit score rating scale assigns it a category ranging from Poor to Exceptional. A higher number indicates to lenders that a person is a lower risk for default:

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

As you can see, a Fair credit score falls between 580 and 669. A Poor or bad credit score falls between 300 and 579. The minimum credit score required to qualify for a loan is around 610 to 640, depending on the lender — meaning not everyone with a Fair score would qualify.

Recommended: Do Personal Loans Build Credit?

Why a Credit Score Can Go Down After Paying Off a Debt

Paying off debt feels good and improves your financial situation. But it could also cause your credit score to drop. This negative impact can be due to changes in one or more factors, including:

•   credit utilization

•   credit mix

•   overall credit age

When you pay off a credit card and then close the account, you reduce your available credit and increase your credit utilization. Similarly, if you pay off your only car loan and close that account, you have one fewer type of account in your credit mix. Finally, paying off and closing an older account may reduce the average age of your overall credit history. (We’ll explore these scenarios in more detail below.)

While none of these things is “bad” in financial terms, it could temporarily count against you in the world of credit scores.

What Is Credit Utilization?

Now for a little more background on credit utilization. Credit utilization is a factor with revolving forms of credit, such as credit cards and lines of credit, where you can reuse the account up to your limit.

Your credit utilization rate, or ratio, is determined by dividing the sum of your credit limits by the sum of your current balances. So if someone has a $5,000 limit and is using $2,500, that’s a 50% credit utilization rate. Your rate should be kept below 30% to avoid a negative affect on your credit score.

What Is a Credit Mix?

Lenders like to see that an applicant can successfully handle different kinds of credit. This includes installment loans like mortgages, car loans, and personal loans, as well as revolving credit such as credit cards and lines of credit. If a person can manage both types of credit well, a lender will likely consider them less of a risk.

Recommended: Should I Sell My House Now or Wait?

How Credit Age Factors In

The length of your credit history demonstrates your experience in using credit. To lenders, the longer the better. When payments to an older account are on time, this combo reassures lenders that you will likely continue to make timely payments going forward.

New credit accounts can also lower your credit age. More important, opening or even applying for many new accounts in a short period of time may be a red flag to lenders that you could be in financial trouble. The application process also involves a hard credit inquiry, which can lower your credit score.

Sample Scenarios

Here are two examples of someone paying off a credit card. In one case, the credit score goes up. In another, it goes down.

Credit Utilization Goes Down / Credit Score Goes Up

Let’s say that someone has a credit utilization rate of 40%, which is negatively impacting their credit score. (Remember, below 30% is best.) When they make enough payments to bring their utilization rate down to 25%, this can boost their credit score.

Credit Mix and Age Go Down / Credit Score Goes Down

Now, let’s imagine that someone pays off the balance of their first and only credit card. This should help their utilization score! But wait: Then they close the account, and their average credit age drops. And since this is their only form of revolving credit, their credit mix has lost out, too.

Counterintuitively, paying off the card may make their credit score go down — at least in the short term.

Recommended: What Credit Score is Needed to Buy a Car?

Paying Off a Loan Early vs Paying It on Schedule

People often wonder if it’s better to pay off a loan early, if you can. In the case of a personal loan, early payoff can lower the average age of someone’s credit history, possibly lowering their credit score.

But in reality, the impact will depend upon their overall credit situation. Paying the loan off according to the schedule will keep it open longer, which can help with their credit age. On the other hand, they’ll pay more in interest because the loan is still open.

If you’re in this situation, weigh the pros and cons before making the decision that’s best for you.

How Long Can It Take To See Your Credit Score Change?

According to the credit report agency TransUnion, credit reports are updated when lenders send them new information. In general, this happens every 30-45 days, though some lenders update more frequently.

If you’re concerned about your numbers, consider signing up for a credit score monitoring service. What qualifies as credit monitoring varies from company to company. Look for a one that sends alerts whenever your score changes for better or worse.

Recommended: What Is a Tri-Merge Credit Report?

The Takeaway

How paying off a debt affects someone’s credit score depends on the person’s overall credit profile. Paying off a credit card typically helps your credit score because the account remains open, lowering your credit utilization. Paying off a loan can hurt your score because the loan is then closed, potentially reducing your credit mix and age. Generally, though, borrowers shouldn’t let credit score concerns prevent them from taking actions that are in their financial interest.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

How fast does your credit score increase after paying off a debt?

In fact, your credit score may dip for a short period after a debt is paid off. Lenders report new information to credit reporting agencies every 30-45 days, though some lenders update more frequently. Generally, you shouldn’t let concerns about your credit score prevent you from taking action that is in your best financial interest.

Is it best to pay off all debt before buying a house?

According to credit report agency Experian, it generally makes sense to pay off credit card debt before buying a home. Just know that in some circumstances, paying off a debt may temporarily reduce your credit score, which can affect the loan terms you qualify for. If you do pay off a credit card, consider keeping the account open until after you qualify for a loan.

How do you get an 800 credit score?

Pay bills on time, maintain a credit utilization rate under 30%, and effectively manage your credit history length, new credit requests, and credit mix. Although this won’t guarantee a score of 800, it can help you maximize yours.

Photo credit: iStock/Patcharapong Sriwichai

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL-Q324-036

Employers can approach background checks in different ways. In some cases, credit reports are included. A job background check may include a credit check in certain industries, such as banking and security. The size of the company can be a factor, too: Large corporations are more likely to conduct a credit check than a small family business.

We’ll walk through the specifics of when an employment background check may include a credit check, why potential employers want this information, and what financial data they have access to.

What Are Credit Checks?

A credit check is a request to see your financial data as collected by one of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Credit reports contain information about past and existing credit accounts, payment patterns, and how much debt you’re carrying.

According to the Fair Credit Reporting Act (FCRA), only certain individuals and organizations have the right to check credit histories, such as lenders, insurance agents, and landlords. Potential employers can also conduct a credit check for employment purposes, with your permission.

Sometimes credit checks are conducted to confirm a consumer’s identity — and head off identity fraud — rather than to investigate your financial history. For instance, banks may run a limited credit check on customers looking to open a checking account.

Credit Check vs Background Check

A background check contains identification verification information along with data from criminal records, educational and employment backgrounds, civil records, driving history, and more. In some instances, a background check may also contain a credit check.

The Importance of Good Credit

A good credit history primarily makes it easier to get approved for a loan and to qualify for better interest rates and loan terms. The higher the score, the less someone will pay in interest over their lifetime, potentially saving them money in the long run.

Good credit can also help renters qualify for an apartment. In some cities, renters routinely provide a credit reference with their rental application. While there’s no minimum credit score needed to rent an apartment, a strong credit history shows landlords that you’re someone who pays their bills on time.

Employers may also check your credit if you’ve applied for a job. Having good credit without any red flags can make the hiring process go more smoothly. However, some cities and many states have banned this protocol or put limits on it.

Recommended: Should I Sell My House Now or Wait?

Why Employers Look at Your Credit Score

An employer may run a credit check on a job applicant whom they’re seriously considering hiring. Employer credit checks are more common in industries where employees handle money or have access to customers’ financial data.

By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, or customers.

Responsibility

A credit report shows how responsibly an applicant has handled their own money. If there are any red flags, the employer may not want to hire that person to handle company funds or take on other important responsibilities.

Security

A credit report can be used to verify your identity along with other pieces of background information. If there are discrepancies that can’t be easily cleared up, that’s a red flag.

What a Credit Report May Tell an Employer

The information in a credit report can include employment history as well as red flags such as late payments, debts sent to collections, foreclosures, liens, lawsuits, and judgments.

Employment History

Your complete employment history is not included in a credit report. Past and current employers may appear on your credit report, but only if you listed them on a loan or credit card application. Typically, if a lender wants your employment history, they will ask you for it directly.

Late Payments

Credit reports contain information about current and historical credit accounts, including installment loans (mortgages, car loans, personal loans) and revolving credit (credit cards and lines of credit). The reports typically contain information from the past seven to ten years, including a person’s payment history and whether credit accounts are paid up to date or are past due.

Debt Collection

Once someone is behind on payments — at least 120 days — the lender may send the account to a collections agency. These agencies attempt to collect on the bill. This can have a significant impact on your credit score, since making payments on time is the biggest factor in the algorithm that determines your credit score.

Debt Charge-Off

If a company you owe money decides they can’t collect the funds, they can “charge off” the amount as uncollectible. This may stay on your credit report for seven years, starting with the delinquency date that ultimately led to the charge-off. A debt charge-off typically lowers the person’s credit score even more than going to collections.

Foreclosures

When a homeowner misses multiple mortgage payments, the lender may take possession of the home, or “foreclose” upon it. This remains on a credit report for seven years, starting with the first missed payment that ultimately led to the foreclosure. This can significantly reduce someone’s credit score — although the impact may diminish over time — and can be a red flag for employers.

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Liens

A tax lien is a claim that you owe money for taxes, usually federal, state, or property tax. Tax liens no longer appear on credit reports by the three major credit bureaus, and they can’t affect your credit. They are, however, available on public records. If an employer conducts a full background check, they can still receive this information.

Lawsuits and Judgments

Just like tax liens, judgments from lawsuits are not included in credit reports or factored into a credit score. An employer that conducts a background check, though, will likely receive this information because it’s part of public records.

How to Prepare for an Employer Credit Check

Every consumer should be aware of what information is available on their credit report. You can request your credit report and find out your credit score for free at AnnualCreditReport.com.

Review your report for errors. Even small typos — like misspelling your name — could present problems down the line. Report inaccuracies to the relevant credit bureaus via their online dispute process to have them corrected or removed.

You may also consider signing up for a credit monitoring service. What qualifies as credit monitoring varies from company to company. Look for a service or a money tracker app that sends customers alerts whenever their credit score changes, accounts are opened or closed, and red flags appear on their credit history.

If you’ve had financial problems in the past but have turned things around, be prepared to explain to your potential employer how you’ve accomplished that.

Recommended: What Is a Tri-Merge Credit Report?

Credit Check Limitations

Credit reports contain a lot of private financial information. However, you can feel secure knowing that there are strict limits to what can be included. The following information cannot appear on your credit report:

•   Account balances for checking, savings, and investments

•   Records of purchases made

•   Income information

•   Judgments and tax liens

•   Medical information (physical and mental), although money owed to a doctor or hospital can appear

•   Marital status

•   Disabilities

•   Race and ethnicity

•   Religious affiliations

•   Political affiliations

Does an Employer Credit Check Hurt Your Credit Score?

No. Employers conduct what is known as a “soft credit inquiry” or soft pull. Because the credit check isn’t the result of applying for a new loan or credit card, the request probably won’t appear on your credit report and it won’t affect your score.

What Are Your Legal Rights as a Job Applicant?

According to federal law, job applicants have the right to:

•   know what is in their file

•   ask for a credit score

•   dispute incorrect or incomplete information

•   be told if information in the file is used against them

An employer or potential employer must get written consent before they can request credit report information (the trucking industry is an exception). Some cities and many states have banned or put limits on an employer’s ability to check your credit report.

The Takeaway

Employers may run credit checks on applicants as part of the hiring process. By conducting credit checks, businesses hope to confirm that an applicant demonstrates financial responsibility and doesn’t pose a security risk to the company, other employees, and customers. Credit checks are more common at large corporations and in industries where employees handle money or have access to customers’ financial data. You can prepare for an employer credit check by requesting your report and correcting any errors. You may also want to use a credit score monitoring service to keep tabs on any changes.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Why do background checks include credit reports?

Information found in a credit report can give the employer a sense of the job applicant’s financial stability. This may be especially important if the job involves handling money, financial data, or pharmaceuticals. Some industries that routinely pull credit checks on applicants include banking, retail, insurance, public safety, and security.

Does a background check include a hard credit check?

No. A background check with a credit check involves a soft inquiry, so it won’t affect your credit score.

What causes a red flag on a background check?

Criminal records, suspicious credit histories, inconsistencies in information provided, and gaps in employment history can be considered red flags in a background check.

Photo credit: iStock/serggn

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Although Experian is the largest credit bureau in the U.S., TransUnion and Equifax are widely considered to be just as accurate and important. When it comes to credit scoring models, however, there is a clear winner: FICO® Score is used in roughly 90% of lending decisions.

It’s crucial that consumers understand at least the basics of how credit reports work and credit scores are calculated. After all, a high credit score can get borrowers the best deals on loans and credit cards, potentially saving them many thousands of dollars over a lifetime. Read on to learn how you can build a credit history that lenders will swoon over.

Will My Credit Score Be the Same Across the Board?

In a word, no. Credit scores vary depending on the company providing the score, the data on which the score is based, and the method used to calculate the score.

In an ideal world, all credit bureaus would have the same information. But lenders don’t always report information to every bureau, so there will be variations in your credit file — usually minor — from bureau to bureau.

How Are Credit Scores Calculated?

Regardless of the scoring model used, most credit scores are calculated with a similar set of information. This includes information like how many and what types of accounts you have, the length of your credit history, your payment history, and your credit utilization ratio.

Lenders like to see evidence that you have successfully managed a variety of accounts in the past. This can include credit cards, student loans, personal loans, and mortgages, in addition to other types of debts. As a result, scoring models sometimes include the number of accounts you have and will also note the different types of accounts.

The length of your credit history shows lenders that you have a record of repaying your debts responsibly over time. Scoring models will factor in how recently your accounts have been opened.

Your payment history allows lenders to see how you’ve repaid your debts in the past. It will show details on late or missed payments and any bankruptcies. Scoring models typically look at how late your payments were, the amount you owed, and how often you missed payments.

Each scoring model will place a different weight of importance on each factor. As an example, here are the weighting figures for your base FICO Score:

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Which Credit Score Matters the Most?

As noted earlier, the credit score that matters the most is generally your FICO Score, since it’s used in the vast majority of lending decisions. There’s really no way to determine which credit score is most accurate, though, because they all use slightly different scoring models to calculate those precious three digits.

Even within your FICO Score, there’s variation. The most widely used FICO Score is FICO 8 (though the company has released a FICO 9 and FICO 10). This differs from previous versions in key ways:

•   Credit utilization is given greater weight.

•   Isolated late payments are given less weight than multiple late payments.

•   Accounts gone to collections for amounts less than $100 are ignored.

In addition, FICO can tweak their algorithm depending on the type of loan you’re applying for. If you’re looking to get an auto loan, your industry-specific FICO Score may emphasize your payment history with auto loans and deemphasize your credit card history.

As you can see, slight differences in method can result in different credit scores even given the same source data.

What Are the Largest Three Credit Bureaus?

The three major credit bureaus are Experian, Equifax, and TransUnion. These bureaus collect and maintain consumer credit information and then resell it to other businesses in the form of a credit report. While the credit bureaus operate outside of the federal government, the Fair Credit Reporting Act allows the government to oversee and regulate the industry.

It’s worth noting that not all lenders report to the credit bureaus. You may have seen advertisements for loans with no credit check. Lenders that offer this type of loan won’t check your credit, and typically don’t report your new loan or your loan payments to the credit bureaus. Because these loans are riskier for the lender, they can justify high interest rates (possibly as much as 1000%) and faster repayment schedules. Consumers should beware of predatory lenders, especially risky payday loans and other fast-cash loans.

How To Find Your Credit Score

Your credit history and score play a large role in your personal finances. They can impact everything from taking out a mortgage or renting an apartment to buying a car and refinancing your student loans. Having an idea of what your credit score is can help you determine what your loan may look like and how much you can afford to borrow.

You can request a free copy of your credit report from each of the major credit bureaus at AnnualCreditReport.com. Typically, your credit reports will not contain your credit scores. However, you may be able to access your FICO Score for free through your bank or credit card company (it may be on your statement or you may be able to see it by logging into your account online). You can also purchase credit scores from one of the three major credit bureaus or FICO. Some credit score services offer free scores to any user, while others only offer sores to customers who pay for credit monitoring services.

Be careful when you pull your free credit reports not to accidentally opt in to an add-on service that will charge you for special tools or credit monitoring.

Building Strong Credit

Credit scores aren’t set in stone. They evolve constantly as new financial information comes in, both positive and negative. Here are some strategic steps to consider for those trying to build a positive credit history:

Make Payments on Time

This includes credit card payments, rent, loans, utilities, and any other monthly bills or payments. Lenders often consider past behavior to be a predictor of future behavior and want to avoid lending money to individuals with a history of missed payments.

Pay Down Revolving Credit

Revolving credit refers to credit cards and credit lines, such as home equity lines of credit (HELOCs). Lenders generally like to see that you use no more than 30% of the total revolving credit available to you. It’s an indicator that you are able to effectively manage your credit.

One popular way to pay down high-interest revolving debt, is to use a debt consolidation loan. These are unsecured personal loans that typically offer lower fixed interest rates compared to credit cards. Getting approved for a personal loan is fairly straightforward, and you can usually shop around for the best personal loan interest rates without it affecting your credit score.

Be Selective About New Accounts

Opening a new credit card or applying for a loan generally involves a hard credit inquiry. Too many hard credit inquiries can have a negative impact on the applicant’s score. So while having a diverse mix of credit is a good thing in the eyes of lenders, opening a number of new accounts at once may be counter-productive.

The Takeaway

All three major credit bureaus — Experian, Equifax, and TransUnion — are more alike than they are different, and any variations in their data are usually minor. Equifax is the largest credit bureau in the U.S., but TransUnion and Equifax are thought to be just as important. When it comes to credit scores, however, lenders prefer FICO Score by a wide margin.

SoFi Personal Loans

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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