How do credit checks work?

When applying for a personal loan, mortgage or credit card, the lender will typically run a credit check on your file. By reviewing information about your financial situation, they will get a better idea of your creditworthiness and whether you will be eligible for their product and what rate you should pay.

The lender will pay to access your information from one or more of the 3 main credit reference agencies in the UK: Experian, Equifax and TransUnion. Before checking your credit file, the lender will usually ask for permission in the application process such as the terms and conditions.

Lenders will tend to have credit checking automatically integrated into their system. So when a customer applies, they will instantly be credit checked and based on the lender’s criteria, they will either be declined or reach the next stage of the application.

In addition to loans, even applying for broadband, mobile phones and store cards may involve the use of a credit check and the best rates will usually be reserved for those with good credit as they are considered a lower risk of missing repayment. Conversely, those with poor credit may pay higher rates of interest, which is typical for credit cards and mortgages, because the lender is taking on more risk.

What lenders see when they check your account

By running a credit check on your file, the lender will receive your credit score, which ranges from 0 (very poor) to 999 (very good). This score or ‘rating’ gives lenders a number that they can work with and they can accept customers based on their scores or allocate different interest rates accordingly.

When checking someone’s file, the following information will be made available:

  • Your full name and date of birth
  • Electoral roll information to confirm your current and previous addresses
  • All loans, credit card and mortgage accounts that are open, their start date and loan amounts. All accounts closed in the last six years will be listed.
  • Current account overdraft
  • Previous application searches and footprints
  • Joint accounts with other people e.g spouses
  • Any missed repayments and number of times it has happened
  • History of debt including bankruptcy and CCJs
  • Information on whether your identity has been used for fraud

Source: This is Money

How lenders use this information when they assess your application

With access to your credit file, lenders will use all the relevant information to decide whether you are eligible for the loan or credit product.

To start, if your name and address is verified and confirmed on the electoral roll, it indicates that you are a real person living in the UK. This is a trust signal for lenders who are trying to confirm your identity and reduce the risk of fraud.

By understanding how many loans or credit cards you have open and the amounts outstanding, credit providers can get a better ideal of your financial commitments and what you can afford.

Above all, if the individual has a history of missing repayments or has declared bankrupt in the past, this means that they will be a greater risk to lend to and therefore may not be eligible.

Having a joint account with another person such as a family member or partner can also have implications on your credit history. if you share a bank account or mortgage with someone else that has a bad credit rating, you may be considered a higher risk to lend to because of your association with him or her. for instance, they might assume you have to pay the other person’s bills from time to time and this is an extra strain on your finances.

Lenders will leave a footprint

When a lender performs a credit check on you, it may leave a footprint on your account depending on if they completed the credit check using a soft search (preliminary search) or a hard search. A soft search gives the lender the information they need from your credit file, but it will not be visible to other lenders that the search was done. A hard search is a visible mark on your credit file stating that a search has been made - this is known as a 'footprint'.

As other credit companies run a credit check, they may see how many other footprints have been made. A hard footprint is visible on the individual's file for around 12 months.

To understand what sort of search a lender may be carrying out on you it is best to contact them directly.

Source: MoneySavingExpert

Reciprocal data

Credit checking is based on reciprocal data – so whilst credit reference agencies can make this information available to lenders, banks and individuals, it is essential that any future information about the customer is reciprocated and sent back.

So if a customer has borrowed with a lender and they have missed repayment or paid on time, this information should then be sent back to the credit reference agency that will update the file. Therefore, any future companies that carry out a credit check will have access to the individual’s most up to date information.

In the case of payday loans, if customers repay their loans on time, the data will be sent to an agency like TransUnion who will acknowledge that the customer paid on time and this may cause the credit score to improve. However, if the customer misses repayment, this information will always be made available to the credit reference agency and this may cause the credit score to fall. So if the customer defaults on their loan but tries to borrow elsewhere, the credit check will show that they missed a recent repayment and may not be right for a loan because they are experiencing financial difficulty.

An individual’s credit score can always go up or down depending on how they manage their financial transactions. It is possible to check your credit file with a specialist company on a free trial or for a few pounds a month. This will allow you to make sure your credit score is as high as possible so you can get the best rates and maximize your chances of being approved for future credit.