What is a Credit Check?

Man using phone

A credit check (or search) happens when a lender checks your credit report. There are hard and soft credit checks. A hard credit check occurs when lenders check your credit score before approving credit cards, personal loans, mortgages or any other credit commitment. These searches will leave a mark on your credit file that lenders can see. Soft credit searches are for background checks and don’t leave a mark visible to lenders.

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

The majority of us have some kind of debt finance product whether that is a credit card, mortgage, loan or overdraft, and even mobile phone contracts are a credit product. To enable lenders to determine if we are a responsible borrower when considering a new application, they run a credit check.

What is a lender?

Lenders can be an individual, a company or other financial institution such as a bank that makes funds available with the expectation that the money will be repaid. Repayment usually includes interest or fees and repayment may occur in increments, such as a monthly payment, or as a lump sum.

Can anyone check your credit file?

A company must have your permission to check your file and they pay the credit agencies a small fee to access your data.

What does a credit check show?

A credit check shows lenders your overall desirability as an applicant by looking at a number of factors. This includes personal information, such as your address and employer, as well as your financial history.

What do lenders see when checking your credit file?

Current and previous addresses

A credit check will reveal your current and any previous addresses. 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 on your file.

Financial commitments

Your credit file will reveal details of any existing financial commitments you have such as loans, mortgages and credit cards, plus any missed or late payment history.

Bankruptcies and unpaid tax can stay on your credit report for up to 10 years, other negative information can remain on your report for around 7 years. Positive factors on your report can remain there for around 6 years

Applications for loans and credit

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, however only affect your score for the first 12 months.

Unpaid debts and public records

Your credit report will also show unpaid debts that have been 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.

Repayment habits

Your credit report shows lenders how you repay your debts. If you have a history of paying on time and in full, this is a positive attribute. But, if your credit file shows you consistently struggling with payments this will suggest you are a high-risk applicant.

Financial associations

If you hold a joint account with someone else this will be shown as a ‘financial association’ on your credit report. Financial associations include joint accounts, mortgages, credit cards and loans.

If you’ve been a victim of fraud

Whilst being a victim of fraud shouldn’t directly affect your credit rating, it can still cause issues until the matter is resolved. This is one of the many reasons you should check your file for errors, something you can do easily with a service like Credit Angel.

What does your credit report not include?

Your credit report does not include information like marital status, bank account balance, income or education level achieved.

How do lenders use this information?

Lenders use this information to determine if you will be a good or bad credit risk in the future. Your credit report and score will determine the types of lending products you can access and the rate, or cost, of any further borrowing.

Many lenders will not lend to customers with a poor credit profile. A poor credit profile may 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?

Many types of businesses check your credit report when you make an application for services with them. These include 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. 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.

Soft searches do not have any impact on your credit report and are only visible to you. All hard searches made to a credit report within the last 24 months are listed on the credit report and these are visible to everyone.

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?

Each of the big three credit agencies use a different scale to determine what is a good score. For Experian, an excellent score is between 961-999. An excellent score for Equifax is between 466-700. Callcredit have a rating out of five, five being excellent.

How each agency rates your credit score

Band

Equifax

Experian

Call Credit

Very poor

0-279

0-560

1

Poor

280-379

561-720

2

Fair

380-419

721-880

3

Good

420-465

881-960

4

Excellent

466-700

961-999

5

A credit score is important because it 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 as all lenders have different criteria and risk ratings for 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 your credit score include late payments, customers making only a minimum balance payment, 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?

Yes! You can, and should, regularly check your credit record to keep on top of your credit rating. This will give you a better understanding of where you are and how you can make yourself more attractive to lenders to get the best deals.

Credit Angel allows you to keep on top of your credit rating and financial records easily. Meaning you can have a complete overview of your status as you try and build your credit rating. By understanding the information a potential borrower can see you will be better placed to improve your credit profile.

Does checking your own credit record affect your credit score?

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.