What are Credit Checks and how do they work?

When applying for any type of credit or loan whether it be a personal loan, short term loan, payday loan, credit card, etc, the lender should complete a credit check which will appear on you file against the application you just made. (Please Note : Before any lender can check your credit file, they must ask for permission in the application process, this is usually found as an opt in tick box and/or the terms and conditions) The reason they do this is to review the information regarding your financial situation, which forms part of the information they need to gain an understanding of your creditworthiness and whether you will be eligible for their loan and potentially, what rate you might pay.

Other forms of credit applications may result in a credit check being performed as part of the application, for items like mobile phones, insurance, store cards, etc. The better the credit score you have means you’ll receive better rates of interest which means you’ll have lower repayments. On the other hand, if you have a bad credit score, lenders may view you as a risk of missed or non-payment and offer you a higher interest rate and higher payments to offset the risk.

There are 3 main credit reference agencies in the UK which the lenders may use: Experian, Equifax and TransUnion (formerly Call Credit). As many lenders operate mainly online, they can credit check automatically as part of the application process, this feeds into their back office lending solution which, based on their lending criteria can either be declined at this point or approved to proceed.

Are too many credit searches bad for my credit file?

When you apply for any type of credit and the lender/credit company looks at your credit report to evaluate your application it leaves a mark on your credit report of when, what for & how much your application was for.

Some lenders will look at these searches and view them as a negative, as it suggests that you are having to apply over and over because you are being refused the credit you want, however, LoanPig sees things differently, we don’t take too much interest into how many other lenders have refused you or how many credit searches have been performed on your account.

Credit searches stay on your credit file for 12 months. Something you might want to think about is insurance comparison sites…… when you complete your details on a comparison sites if your application brings up 5 insurance companies that are willing to offer you insurance, it is likely you have 5 new credit searches on your file now.

What lenders see when they check your Credit file?

Your credit file contains a number which, depending on which credit reference agency your lender has used, could be between 0 and 999 but essentially this is the number a lot of lender use to pigeon hole you straight away if you have a bad (Lower score) or good (higher score) credit score.

When a lender checks your file they are given access to a number of pieces of information that will help them build a profile for you, this profile will form part of the overall decision to approve you for credit or a loan and at what level of interest.

Some of the information they can see;

  • Your Name, DOB, current and previous addresses.
  • Whether you are confirmed by electoral roll information, past credit data or postal address.
  • Number of open/active and closed loans, current accounts, credit cards, catalogue accounts (Home Credit), Hire Purchase agreements, mortgage accounts, etc. (all accounts whether settled, satisfied, in default, etc are kept on your file and included in your profile, for 6 years)
  • Current/closed loan, mortgage, HP, etc. monthly payments
  • All previous applications for accessed your credit report over the last year
  • Your history of good, bad or indifferent payment history over the last 6 years including any CCJ’s, IVA’s, Bankruptcies, DMP’s, Arrangement to pay, etc.
  • Associations with any other people and All previous addresses, including your credit history from those addresses

How will the lender use this information?

As we discussed earlier in this page, lenders will take your credit score itself and interrogate all of the information made available to them to make a decision as to whether they are willing to lend to you or not.

They will look at, but not be limited to, verifying your name and address either on the electoral roll, previous credit or address search to indicate that you are a real person.

Assess your ability to pay loans/credit based on your previous payment history.

All of the information they look at and assess determines whether your are a risk to lend to or are putting yourself at risk by being lent to or both.

Lenders need to make a decision as to whether they are going to lend to you or not based on all the information they have available, so any application data you complete needs to be truthful to represent your current financial situation. Also, keeping an eye on your credit file to make sure there is nothing out of the ordinary will help your application.

Lender’s Responsibility to update your Credit File

Each Lender has a responsibility to update the Credit Reference Agencies with your payment history whether it is good or bad.

Negative impacts regarding repayments;

  • If you miss a single payment
  • If you continue to miss payments
  • If you do not pay at all

Positive impacts regarding repayments;

  • Make a payment on time
  • Continue to make payments on time
  • Complete the loan or credit facility
  • Make an arrangement to pay your loan back with your lender

The negative impacts will reduce your credit score over time and make it harder and harder to obtain credit at all or at a lower interest rate.

The positive impacts will help your credit score over time making it easier to obtain credit and at a better interest rate.

Every time there is a negative or positive impact on your score, the next lender you go to can see that impact which may improve or reduce your chance of getting that loan or credit.

Summary

Your credit score is important to you if you want any form of credit or a loan in the future.

Keeping it in tip top condition can save you hundreds if not thousands of pounds, over the years, in interest payments. Check out this free for life service from Experian

If you take out a loan or credit, make sure you can afford to repay it, if you think you can’t, look for another way because if you default and your credit score goes down you’ll be paying a higher interest on your next one.

Repay the payday or short term loans or credit you have got, to improve your credit score.