Most of us are familiar with the concept of credit checks – these are checks carried out by a potential lender to see how creditworthy you are and detail your past and current financial history. They enable a potential lender to see how much debt you have and whether you pay your bills on time, so they can decide whether to approve you for a loan, credit card or other form of borrowing.
Credit checks are also typically carried out by non-credit organisations, such as home insurers looking to verify your identity and proof of address.
How credit checks affect your credit score
Every time you apply for a loan, mortgage, credit card etc. this is recorded on your credit file and this can seriously affect your chances of getting approved for further credit in the future.
If you have multiple applications recorded around the same period of time, this can smack of financial desperation. This suggests to the lender that not only are you desperate for a loan / credit card, but you may have problems paying any borrowed monies back. This could see them reject your application – even if you have never missed a payment on any previous credit agreements.
The knock-on effect is that if your application is declined, when you apply for credit from another provider they will see that you have already been rejected by a previous provider – potentially leading them to do the same.
All these checks leave a footprint on your credit file, which can be very detrimental to your overall credit score.
This applies unless you have had a soft credit check.
What is a soft credit check?
A soft credit check is where a lender (or another organisation that wants to verify your ID) takes a look at your credit report without leaving any footprint visible to other lenders.
A soft check is typically carried out if you ask for a quote, rather than making a full application.
It looks at key pieces of information to check your credit worthiness, so a lender can tell whether you will be successful in applying before carrying out a full (hard) credit check.
While you will still see the soft check on your file, potential lenders will not, meaning that your credit rating is typically not affected.
Within reason, you can make as many soft check enquiries as you like, without damaging your score, giving you the freedom to see if a particular product is the most appropriate for you, as well as checking whether you will be likely to get accepted for the product.
Readers should note, however, that sometimes, what starts out as a soft search could end up showing on your credit file, such as an insurance quote – here’s why…
Soft credit checks that lenders can see on your file
While activities carried out by lenders to check your ID (such as for insurance) typically are soft credit checks, if you decide to pay monthly for insurance, then this may show up on your file. This is because paying monthly is effectively a loan (you pay interest on top and so effectively, this is the same as applying for credit) - and any loan application is credit checked.
If you want to avoid being hard credit checked you should pay for your insurance up front as a one-off payment; you’ll also save money as you won’t be paying interest.
Warning to new online Next customers
Another example of a soft search showing up your file relates to shopping online with Next, the clothing retailer.
There has been a lot of media attention over the fact that if you want to shop online at Next, you have to register with them in order to buy.
Even if you do not want a credit account, they will still soft check you and they say: This credit search will NOT appear on your credit file when viewed by other lenders, unless you take the option of credit from us, or we are unable to offer you credit.
And there lies the problem – even if you do not want credit, when Next soft searches you, it will check your credit worthiness. If they cannot offer you credit, this will be reflected on your file. So when other lenders check your credit history when you apply to them, they'll see you 'tried to get credit', even if you never had any intention of taking credit at Next.
How to maintain a good credit score
As this brief article highlights, you have to be very careful when applying for any type of credit – and with some other financial products too. Here are our five top tips for maintaining a good credit score.
- Only apply for credit when you really need to. When doing so, make sure you check the small print – does it say you will be credit checked?
- When buying insurance or other products that say you’ll be soft credit checked, remember that if you do not pay the annual amount in full, the search could show up on your credit file.
- Make sure you pay all your bills on time; set up a direct debit to make sure you don’t forget.
- Regularly check your credit file – get a copy of your file from one or all three of the major credit reference agencies and make sure that all the information held is correct. If they are any discrepancies, flag them up with the relevant provider so that a note can be put on your file.
- Finally, lenders love longevity. The longer you have been with the same bank, the same employer and at the same address, the more beneficial it is to your credit rating.