What exactly is a credit check?
Many lenders look into a person’s credit score before lending out money, and it is essentially a financial background check.
Equifax, TransUnion, and Experian are the three credit bureaus in the United Kingdom that acquire details on those looking to borrow money. They seek to record details of every person in the country, which is then accessible to lenders who want to review the status of an individual before approving their application.
You will find that the credit bureaus are incredibly likely to have a file on you already, and it documents the following:
Information about your current credit accounts and any loans that you’re currently servicing.
Details of missed or late payments.
Records of utility bill payments.
The amount of money that you can borrow within your credit limit (this is often referred to as your credit utilisation ratio).
Basic identification details like your name and date of birth and whether you appear on the British electoral register.
Your current address and where you’ve resided previously.
Information about whether you’re linked to another person financially (i.e. a spouse that you share a credit card with).
Fundamentally, credit bureaus are tasked with providing these details to lenders to support them to make better decisions about who they give money to. The information they accumulate is then aggregated into a score, which is given in the hundreds.
Unfortunately, each credit bureau scores differently, and they use varying scales and credit scoring models, adding to the confusion. But generally, the higher your credit score, the less likely you will be seen to default on payments. The factors that we introduced above will affect your overall score.
Upon receiving your loan application, the lender will check your score with at least one of these credit bureaus. They will also conduct some independent checks, but the credit file is typically the most important consideration. Contrary to what people often think, there is no universal minimum score that you must achieve in order to be approved for a loan.
Ultimately, you need to be aware that lenders follow different guidelines and have specific requirements, which don’t necessarily require a minimum credit score. For instance, one might be concerned about large loans outstanding but not so bothered about a couple of missed payments here and there. Another lender might forgive store cards but may not be so willing to lend for those with credit cards outstanding.
What’s the difference between a soft and hard credit check?
A lender can perform one of two credit checks when looking into your suitability – a soft or hard credit check.
You should be aware that a hard credit check leaves a record on your file. This is important because too many hard credit checks in a short space of time may be seen as an indication of financial distress, therefore causing the lender to think twice about approving you for credit.
What is a soft inquiry?
Known in the industry as a soft pull, a soft credit inquiry isn’t recorded on your file. These are typically performed by lenders seeking to conduct a basic ID check or by people themselves seeking to find out what their credit scores are.
You can conduct as many soft credit checks as you like without worrying about them appearing on your credit file.
What is a hard inquiry?
As mentioned, a hard inquiry appears on your credit file. It occurs when:
You make an application for a loan or mortgage
You submit an application with a new credit card issuer
You take out a new mobile phone contract
You apply to a new utility company
It’s a good idea to be mindful of your credit score when you’re applying for the above forms of credit, as you don’t want too many hard inquiries on your file.
However, don’t be scared! A few applications here and there are unlikely to negatively impact your credit score. In reality, lenders are most concerned about a series of declines over a short period, which essentially makes you look desperate for credit.
If your application for credit is rejected, don’t start applying for every loan under the sun. Rather, use an eligibility calculator so you can get abreast of your options before taking your next steps. Our guide on what to do when you get rejected for a loan will also help you.
Is it possible to receive a personal loan without affecting my credit score?
Your credit score will be affected when you agree to a personal loan. There’s nothing you can do about this, as opting for new credit – be it a credit card, personal loan, or a mortgage – will increase the level of your outstanding debt and will affect your credit score in the short term.
Don’t be concerned by this, as you will typically increase your credit score by making regular, on-time repayments on your loans. Our detailed guides provide more information on this topic: does taking out a personal loan affect your credit score, and does a debt consolidation loan affect your credit score?
Even in instances where affecting your credit score is unavoidable, you should still take steps to ensure you don’t damage it.
Therefore, it’s vital to avoid unnecessary hard credit checks and failed applications. We advise you to take some time to consider your current circumstances. You can check your credit file for free with each credit bureau, which is helpful for the following reasons:
You will be aware of how good your credit score is.
You can check for any issues or errors that might be affecting you. If you notice any errors, the credit bureau is obliged to correct them upon request.
Combining this knowledge with an eligibility calculator, you can get a much better insight into which loans you’re likely to be approved for. If your credit score is considered to be ‘fair,’ you can benefit from our guide that details loans that might be available to you.
Another good idea is to approach providers whose applications don’t have any impact on your credit score when you’re processing your application. To help you decide whether applying is worth the minimal risks attached, your loan provider will inform you whether or not the application will negatively affect your score.
Koyo begins applications by conducting a soft credit search to ensure our clients’ scores aren’t negatively affected from the outset.
Please note – Koyo and other open banking lenders rely less on credit histories when considering loan applications. For further details, read our comprehensive guide: Open Banking Explained.
Credit Score Inquiries FAQs
Is checking your credit score regularly a bad thing?
Certainly not. Rather, it makes good financial sense to check your credit score every few weeks to monitor any changes. Your score will not drop because you check it regularly. You might also make use of credit checking third parties who take care of regular soft checks on your behalf. But before you pay for their services, you should always be able to receive a free update from the three major bureaus.
Why does checking your credit score cause it to go down?
This is a misnomer; checking your credit score doesn’t affect it. However, submitting a large number of loan applications in a short period will cause a lender to think you’re having financial issues, meaning they will be less willing to approve your application.
How many points will you decline after making an inquiry?
A relatively small number of credit applications will have a negligible impact on your credit score. Conversely, too many applications in a short period will make you appear high-risk to financial institutions, so bear this in mind when applying for credit.
Is it possible to check my credit score without negatively impacting it?
As mentioned, checking your own credit score isn’t a bad thing. It’s also free, and you can check your score by heading to one of the three credit bureaus directly. For instance, you can check your Experian credit score for free by clicking here.
Will my credit score be affected by a credit card application?
Yes. All types of loan applications affect your credit score. Any time you apply for a credit card, personal or student loan, mortgage, overdraft, vehicle, or any other type of loan for that matter, your credit score will be affected.
Next steps
While the information above is a lot to digest, here’s a brief summary:
The vast majority of lenders will check your credit history when you apply for a loan.
Upon checking your file, they leave behind a record that other lenders can see. Too many loans in a short period of time will look bad and may affect your success in acquiring credit.
There’s no harm in making a few credit applications, but if you’re not approved, pause and consider your available options (such as an eligibility calculator) as opposed to continuing with several applications.
Koyo makes the most of Open Banking technology, as opposed to just information from a credit reference agency. This enables us to base our lending decisions on your actual financial situation instead of what a separate entity says about you. Crucially, an initial application with us won’t damage your credit score.
For more information, visit www.koyoloans.com – Representative APR 27%.
Read more:
Will Running a Credit Check Affect My Credit Score?