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Will my credit file be checked when I apply for a loan?
One of the key tests anyone who wants access to finance has to pass is a check on your credit file. For some people this is a mere formality, allowing the lender to rubber stamp their decision to grant access to finance and approve the loan or credit as ‘affordable, while for some people the credit check can act as a real barrier to even the smallest of loans. So will lenders check your credit file every time you apply to access finance, what does a credit check mean and how can you lessen the barrier that a credit check represents? Let’s take a look below.
What is a credit check?
When you apply to a lender for finance, the first thing the lender wants to do is find out if it’s likely you’ll be good for the money. In the old days when people knew their bank managers personally it was a case of the banker remembering whether or not you paid back your last loan on time, but in today’s high tech world of mass consumer banking it’s simply not possible to operate like that. As a result, banks and lenders trust credit agencies to do their checking for them. There are three main credit agencies: Experian, Equifax and Trans Union, and it’s their job to keep a file on every single person who has ever interacted with the banking system in the UK. Whether that’s to open a simple current or savings account, to take out a mortgage or even a phone contract or car finance deal. As well as a file of basic information and a rundown of all your financial dealings and entanglements, the credit agency will sum up your situation in the form of a numerical credit score – the higher the better.
So, when you ask a bank for a loan, they get in touch with one or more of these credit agencies to see what information they hold on you, and then they use that information to decide how risky it’s likely to be to lend money to you. This is called a credit check, and depending on which criteria they decide is most important, they’ll look into how much you’ve borrowed, how regular your payments have been or various other things to make a decision. They even consider how many times your credit has been checked when they make a decision, so it’s always a good idea to limit the number of times you apply for finance if you possibly can.
Will my credit file always be checked?
The short answer to this is yes. In the UK it is legally required for creditors to check a person’t credit file before offering any kind of finance to make sure that the finance they’re offering is affordable and appropriate for the person who is looking to borrow. That being said, there are two different kinds of credit check they can perform which have different impacts on your score: Hard and soft credit checks.
A hard check is when a creditor actually gets in touch with the credit agency to ask them how the money you’re trying to access will affect your finances. This is the more serious of the two checks, and will be recorded by the credit agency, so it’s always a good idea to try to limit the number of hard credit checks that are made by lenders. Some credit agencies will infer negativity from a large number of credit checks being performed in a short period of time as it appears that you may have been repeatedly refused credit, and will mark down your credit score accordingly.
A soft check, on the other hand, can be carried out by a lender without having to do anything that will affect your score. Rather than actually asking the credit agency how a person’s proposed borrowing will affect their credit, they just look at the credit file themselves and draw their own conclusions. This allows them to ‘pre-approve’ your applications, because they can tell if you’ll pass any subsequent hard checks without having to actually carry one out.
Why do they need to perform a credit check?
At a basic level, credit checks are designed to establish how likely you are to be unable to pay back the money that you owe, but they are also useful for other reasons. As a result of the fact that a certain percentage of people will default on their debts and be unable to pay them back, banks have to charge some people slightly more money in order to offset that risk. Even if you are given credit after a check, you may find that the lower your credit score the more interest you are charged, just in case you do fail to pay back the loan. The flip side of this is that people with better credit are seen as less of a risk, so they can often access the best interest rates that other people aren’t offered, so it’s always a good idea to boost your credit rating when you can. Other institutions also sometimes make credit checks, such as landlord and letting agents and even employers in sensitive industries.
How do I check my own credit score?
Keeping an eye on your credit score is always a good idea, just so you can check for fraud or spot any mistakes, and it is vital when you’re about to try and access finance. The first thing to remember is that there are three agencies, Experian, Equifax and Trans Union, and that they all have different systems of recording your credit. While all of them check and record the same basic things, they all calculate your score differently and they all place emphases on different aspects of your score. For example, one agency might consider the amount of debt you have to be the most important thing, while another might consider missed or late payments to matter most. As you don’t know which agency a lender might use to review your position, it’s a good idea to keep track of all three.
Experian and Equifax are both paid services that charge a monthly subscription fee and will allow you to see your credit score whenever you like, on a user-friendly dashboard. They also offer services beyond this and will give you an idea of the types of finance you can access based on your credit score, which can be useful. Credit Karma (which used to be known as Noddle) on the other hand is a free service which lets you access your report and your score with just a registration. It’s also your legal right to view a copy of your credit report at any time for a one off administration fee of no more than two pounds, a service that you can apply for from any of the agencies, but your report changes regularly so if you want to keep on top of it you might find it more cost effective to subscribe.
What do lenders see when they perform a credit check?
As you can see, your credit report is a big deal when it comes to deciding if you’re eligible for finance or not. So what is it that lenders actually see when they’re making their decision? Every agency lays out their reports differently, but all of them have the same details. Firstly, your basic details: Your name, age, date of birth, your address, your addresses for the past six years and whether you’re on the electoral register. While all of these may seem simple, they’re all indicators that you are who you say you are and that the finance you’ve accessed in the past can really be linked to you. It stops people with the same name being confused, and it stops you being saddled with the debt of the people who now live in your old house!
Next, the credit report will summarise your financial information. This will include your assets in current and savings accounts, as well as anything and everything in your name that counts as credit: account overdrafts; credit cards; store cards; loans; hire purchase agreements and utility debts. This shows your total debt and how much of the total credit that is available to you that you are using, whilst also keeping track of things like the number of late payments you have made. Alongside this financial information will be information linked to your financial ‘identity’, including any past financial convictions or special conditions that you have sought such as fraud offences, CCJs, IVAs or bankruptcies. You should also be aware that you may be linked to other people financially if you have, or have recently had, a current account or credit card jointly in both your names like a spouse or business partner. This can be good if they have excellent credit, as it will boost your score, but equally your score can be dragged down by theirs if they have bad credit.
How can I boost my credit score if my report is poor?
So now you know a bit more about credit checks, when they are made and what the lender sees when they make one, but what if you have a poor credit score and you’d like to make some improvements? Hopefully by now you agree that it’s a good idea to do your best to keep your score up, and luckily there are a few easy ways by which you can top it up if it’s low.
One of these ways is through simple fact checking, which you can do just by going over your personal details and making sure they’re correct. As we already indicated, banks use your credit report to make sure you are who you say you are, and if something as simple as your date of birth or your middle name is wrong it can take points off unnecessarily. A good time to check this is when major changes are made, such as marriages or divorces, which is when mistakes tend to sneak in. As an added tip, being on the electoral register is a great way to boost your score as it is government confirmation of your identity, so it’s a good idea to register to vote even if you don’t actually cast a ballot.
Another way to boost your credit score is good old fashioned debt reduction. Credit agencies actually like to see you take out credit and pay it off because it demonstrates you have the ability to manage your money, so it’s a myth that not taking on debt is the best way to build your credit. However, most agencies take a dim view of borrowers who regularly utilise more than 50% of the total credit available to them, as this can be seen as an unsustainable amount of debt. As a result, the most efficient way to manage your debt is to use a credit card regularly but to pay it off at the end of each month, or at least keep it below 50% of your credit limit.
Thirdly, it’s always best to avoid missing payments wherever you can. There are few things as toxic to your credit score as a string of missed payments, so as far as possible you should prioritise making them above anything else. Ensuring that you have enough stashed away to make another payment over and above the next one, adding reminders in a calendar or a phone so you don’t make mistakes, and occasionally overpaying and paying down your debt are all good tips.
Credit checks are an important and unavoidable part of getting finance, and they’re actually there for your protection as much as the banks’, but there’s nothing to be scared of. Not only are there predictable details that you can watch out for, there are also lots of things you can do to boost your score, so there’s no reason to get concerned next time you’re told you’ll be subject to one.