What is a Credit Check?

A credit check happens when a lender reviews your credit report. Your credit report tells lenders if you are a responsible borrower so they need to see this report whenever they considering a new application.

Because almost all of us have some kind of debt finance product whether that is a credit card, mortgage, overdraft, or just a mobile phone contract we all have a credit file and these are compiled by credit reference agencies.

There are three main credit agencies in the UK, Experian, Equifax and CallCredit who collect and store consumer and business credit information and make this available to lenders.

Any company that reviews your credit file must have your permission to check it. They pay the credit agencies a small fee to access your data. Searches can take the form of either a hard or soft credit search. A hard search occurs when lenders check your credit score before approving a credit line. These searches will leave a mark on your credit file that anyone can see. Soft credit searches are used more for background checks and don’t leave a mark on the applicant’s file. With a soft search, a borrower will see some background information about you but will not see your entire credit history.

What do lenders see when checking your credit file?

A credit check will reveal your current and any previous addresses and any mail sent to any other address at your request will also show up in your file. If you have ever given your employment status and/or your employer details to any of your creditors this will also be included in the information stored.

Your credit file will also reveal details of any existing financial commitments you have such as loans, mortgages and credit cards, plus any missed or late payment history. Even loans that are paid up will still show up on your credit report, and they can stay there for up to ten years after settlement.

Any recent applications for new credit or loans will also appear on your credit report and these inquiries remain on your credit report for 24 months, even if you did not end up taking the facility. Your credit report will show unpaid debts sent to a collection agency, any proceedings that have gone through the court system, and all public records which include things like a bankruptcy order, repossessions, and County Court Judgements.

How do lenders use this information?

Lenders use this information to determine if you will be a good or bad credit risk. Your risk profile determines the types of lending products you can access and the rate, or cost, of that borrowing. Many lenders will not lend to customers with a poor credit profile. A poor credit profile will include County Courts Judgements, defaults and bad debts. A thin credit file, which means someone without much credit history, can also put off lenders because the customer is an unknown entity.

Can anyone check your credit record?

You must give your consent to a company before they can search your credit report and this consent is usually included on their application form.

Typically, credit card companies, lenders, utility companies, and insurance companies are just a few of the businesses that routinely check credit reports as part of their application process.

As consumers know in advance of their file being checked you can control who is checking the file and keep excessive checks to a minimum seeing as these reflect negatively on your credit score.

What is a good credit score?

A credit score enables borrowers to review and improve their credit profile. Lenders make funding decisions based on the entire contents of a credit file and where one lender might decline an application due to adverse credit another one might accept the application. This is because lenders have different criteria and risk ratings for their funding decisions.

Factors that will influence a lending decision can be varied and potential lenders use many indicators to predict which customers can afford new debts. Things that can affect an applicant’s risk profile include late payments, minimum balance payments, since this could indicate someone who is struggling to manage a debt, IVAs (individual voluntary arrangements) or any bankruptcy proceedings. Many lenders will simply not lend at all where there are County Court Judgements, thin credit files, or bankruptcy on the applicant’s record.

People who have access to large amounts of credit might have a low credit score because there is the potential for them to draw down a lot of borrowings in a short space of time and then struggle to service all the debt.

Someone with a thin credit file indicates they have little or no previous financial history and usually means that a lender might decline an application because they are unable to determine a borrower’s potential creditworthiness. The opposite scenario of a borrower with a fat file, full of frequent credit applications can indicate a customer in a financial crisis.

Those people who borrow relatively small amounts of money and who prudently pay off loans and credit cards regularly are not profitable for lenders and while they may have a healthy credit score these are not ideal borrowers for lenders so may also be declined.

Can you see your credit record?

Accessing your own credit file and checking your score does not impact your credit score. Regularly reviewing your own credit file can empower you to take control of your financial record and proactively manage your file and reduce the potential for declined credit. By knowing and understanding the information that a potential borrower can see will help you improve your credit profile.

Sources

https://www.clearscore.com/credit-score/checking-your-credit-report-does-not-affect-your-score

https://www.mrlender.com/how-credit-checks-work

https://www.experian.co.uk/consumer/experian-credit-report.html

https://www.thebalance.com/what-s-in-your-credit-report-960514

http://www.thisismoney.co.uk/money/cardsloans/article-3073267/What-credit-report-says-check-it.html