What is a credit check?

Credit checks play an important role in determining what finance you can access and at what rates. Take some time today to understand exactly what credit checks are, how they can impact your finances, and the benefits of having a good credit score.

Peter Adams Published on 08 April 2020. Last updated on 20 January 2021.
What is a credit check?

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A ‘credit check’ or ‘credit search’ happens when a company accesses information from your credit report to understand your financial behaviour and to determine the risk involved with lending you money.

Your credit report, held by credit reference agencies like Experian, Equifax and Trans Union, contains information of your credit history. It gives lenders a snapshot of your finances, including how well you manage your money and what financial products you currently access (for example, mortgages, overdrafts, loans, mobile phone contracts and even utilities like gas and electricity.)

Who can perform a credit check on me, and why?

Third-parties must have a valid reason to make a credit check on you, for example, if you've made an application for credit with them, you should be notified if a full credit check is going to be conducted. It's safe to assume that any application for credit will involve a credit check at one point or another.

Companies pay to access your information from one of the UK’s major credit reference agencies; with credit checks being performed instantly (often these are built into online credit application systems.)

Examples of people who might run a credit check on you include:

  • Loan providers
  • Banks and building societies
  • Car finance companies
  • Utility companies (gas, electricity and water)
  • Mobile phone companies
  • Employers (though they will not be able to see your full report)

When running a credit check, lenders are looking to ascertain the risk involved with approving you for the type and level of credit you’ve applied for.

To do this, they examine whether you’ve kept up with repayments for any type of borrowing in the past (such as mortgages, overdrafts, short term loans, credit cards, etc.) along with how well you’re currently coping financially, how much you currently owe, and to whom.

If you apply for a product in joint names, say on a bank account or mortgage, a credit check will be performed on both parties.

A credit check will also show up any bankruptcies, county court judgements (CCJs) or defaults on loans held on your credit report (these stay visible for six years.)

Remember, although your business's credit rating can be separate to your personal credit rating, there will often be some overlap. If you’re a director or a person with significant control in a company it is worth understanding the overlap between the two and how to fix your business credit rating if necessary.

What’s the difference between a hard and soft credit check?

There are two different types of credit check- a hard credit check and a soft credit check. It pays to understand clearly the difference between the two.

What is a soft credit check?

A soft credit check is a provisional look at your credit history, accessing only certain limited information on your credit report.

What is a hard credit check?

A hard credit check, sometimes called a hard inquiry credit check, is a complete search of your credit report.

Do credit checks leave a footprint on your credit report?

Yes, in the case of hard credit checks.

When a lender performs a hard credit check on you, it leaves a visible mark on your credit file.

As hard credit checks leave an imprint, any company that goes on to search your record will be able to see that you’ve applied for credit. Too many hard credit checks over a short period can affect your credit rating for up to six months and you may find it harder to be approved for credit beyond this.

The more credit applications you make, the more hard checks are likely to appear on your report.

Whilst individuals can see soft searches on their credit profile, they aren’t visible to companies and have no impact on your credit score or any future credit applications you might make. It therefore doesn’t matter how many of these are performed, as they’re only visible to you when checking your own credit rating.

When might I expect a soft credit check to be made?

To help you manage your credit rating, it’s useful to know the circumstances in which both a soft and a hard credit check might take place.

Soft credit checks are likely to happen when:

  • You search your own credit report, using a credit reference agency
  • A company uses your credit report to verify your identify (for this purpose only)
  • You use a site like Experian to see how eligible you might be for certain types of borrowing

Hard credit checks are likely to happen place when:

  • You apply for a mortgage, loan, credit card or overdraft facility
  • You sign up with a new utility provider
  • You sign up for a pay monthly mobile phone contract

How can I protect my credit record against hard credit checks?

You can protect your credit record against the negative impact of hard credit checks by making as few applications for credit as possible.

Researching your eligibility and suitability for all types of borrowing before making an application is also helpful as it gives you the best chance of being approved for any credit that you request – keeping a good credit rating intact.

Credit reference companies provide the opportunity to check eligibility for lots of different types of credit online. This service is free and only involves soft searches.

If you do need to make a number of credit applications, it can help to space these out at intervals of at least three months.

How can I improve my credit score, in general?

If your poor credit rating is affecting your ability to access borrowing, there are several steps to take to improve your credit score. Many of these will take time to make a difference, but could make it easier to borrow in the long-term.

The steps to take to improve your credit score are:

  • Making sure that you are on the Electoral Roll / registered to vote. Your local council can assist you with this
  • Investigating any suspected fraudulent activity on your bank account or in your name, however insignificant it seems
  • Sticking to agreed repayment plans for any credit you currently have. If you think you may default on a payment, seek good debt help and speak to the lender BEFORE you get into arrears
  • Think carefully about your ability to meet repayments before applying for any type of credit, and have a plan for what you will do if your circumstances change (such as losing your job or separating from your partner)
  • Cut yourself off from any negative financial associations and communicate regularly with your spouse or partner about repayments on shared borrowing – checking all joint accounts regularly, even if you are not using them for personal payments
  • Limit new credit applications and space out any vital requests to at least three-monthly intervals
  • Check your credit report to ensure that any CCJs, defaults and bankruptcies have been removed from your record after six years
  • Try to reduce the impact of any CCJs, defaults and bankruptcies by telling the three main UK credit agencies why you missed payments in the first place, such as through long-term illness or losing your job. They can add a note that will be visible to lenders
  • Make any kind of repayments that you can on any defaulted debts as this will gradually improve your score over the long term

Understanding how credit checks work is one of the most important things you can do to take control of your personal finances.

Even if you’re not taking out a loan in the near future, getting to grips with your credit report now will pay off if you do look at mortgages, credit cards or loans in the future.

» MORE: Tips to improve your credit score

About the author:

Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry. Read more

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