Whenever we apply for a new credit product, whether that is a loan, mortgage or credit card the company offering the service will require a credit check before they accept you as a customer.
Credit card companies, loan providers, utility companies and insurance companies routinely check their new customer’s credit reports as part of their application process to find out their history of borrowing and managing credit. These checks can take the form of a simple background check or a thorough examination of your entire credit history and these checks are referred to as a soft or hard check.
What is a soft credit check?
A soft credit check occurs when you check your own credit score or when a company checks your credit score as part of a background check. This could include banks, lenders, retailers or landlords. Soft credit checks are recorded on your report but do not impact your credit rating.
Companies that want to pre-screen clients, prior to a full credit application will often conduct a soft search first. A soft search returns basic information and is more of a background check auditing details such as the applicant’s home address, date of birth etc. and if these details match what they have been told from the customer then they will process the application through to the next stage.
Soft checks are often referred to as a quotation search because they are used to check a borrower’s eligibility before a full application. Soft credit checks are recorded on your report but do not impact your credit rating. Accessing your own credit file and checking your own credit score creates a soft check but does not impact your own credit record.
What is a hard credit check?
Hard credit checks are used by lenders to review your full credit history when you take out a personal loan or mortgage. A hard credit check is carried out each time you apply for a loan. This type of credit search leaves a mark on your credit history
Hard credit checks are undertaken even if the credit application is with an existing lender. For example if you have a bank overdraft and want to increase your limit, your bank will run a hard credit check before agreeing to increase your credit line. This type of credit search is recorded on your credit file and multiple applications in a short space of time can adversely affect your credit rating.
Why do hard credit checks affect my credit rating?
Too many credit checks can imply to lenders that a borrower might be seeking multiple credit products and could be taking on too much debt. It may signal that this person could be in financial difficulty, which is a negative signal to lenders.
If a borrower has too much debt then they are less likely to be able to afford to pay anyone back, leaving the lender at a higher risk of losses.
Sometimes having several searches within a few days could indicate you have been a victim of fraud. Someone that steals your personal details may be applying for finance in your name; this can usually show up through the footprints on your credit report.
A service like Credit Angel’s allows you easy visibility of these searches, so you can quickly see if this has happened.
Could a credit search be carried out without my knowledge?
Companies must get your permission to access your personal data. Most application forms will include a tick box and require your signature to check your credit file. If there are any searches on your file that you did not give permission for you can ask for these to be removed and the companies who have accessed your information without permission could face heavy fines due to increasingly stringent data protection laws.
Why does the type of search matter to me?
Hard searches can impact your credit score and the likelihood of being accepted for credit products, however if a number of searches have been completed in a short space of time then some credit reference agencies will consider these inquiries to be part of one request, such as if a borrower is shopping around for the best rate or terms of a loan.
Soft searches may also be carried out against someone who is financially linked to the main borrower. The soft search flags any warnings to the lender if their partner has bad credit, because this could affect eligibility, but without leaving a mark on the person’s record.
How can I have fewer hard searches?Avoiding checks is difficult because new lending rules mean that even if you have an existing relationship with a lender and want to increase the credit limit or loan or add a new lending product, that the lender must still check your credit and make sure you are in a position to repay new borrowings.
The UK regulator requires lenders to comply with responsible lending principles and this means that they should not overburden a borrower with debt that they cannot easily afford to repay.
One way to avoid excessive checks is to do some background checks of your own prior to applying for credit products. By determining the likely hood of being accepted prior to submitting a full application you could avoid unnecessary checks. For example if you have a poor credit profile then you are unlikely to be accepted for a very low interest rate product, so save yourself the credit search by only applying with those companies which will give you a preliminary offer ‘subject to status’ and research the lenders offering products in line with your credit score and risk band.