Credit searches and the impact on your credit score

More people are looking at credit solutions to help their businesses navigate these unprecedented times I thought it would be helpful to understand the different types of credit search and the impact of each on a credit rating. What is a credit search? In simple terms searches, or credit checks, as they are sometimes called, are when someone looks at your credit report to find out about your borrowing history.  There are two types of searches, known as soft searches and hard searches, it is important to know the distinction between the two of these as the impact they have on your credit file is quite different.

A credit report allows potential lenders to look at your credit history, with your permission, to enable them to decide on whether or not to lend to you.  Lenders will use your credit report to assess the level of risk they will be undertaking.  The things they will look at include some obvious ones – for example, if you’ve paid back your debts in the past, how you’ve paid it back was it on time or were some of the payments late. They will also look at how much debt you currently have.  All of these factors will give you a credit score which they will look at too, but since a credit score only gives an indication of what’s in your credit report, they won’t use this alone to make a lending decision.

It won’t always be lenders that want to look at your credit report. Sometimes other types of companies may ask your permission to check your report, such as a potential employer or landlord, if they want to see how well you handle your finances. Debt collection agencies may also check your credit report if they’re trying to find out more information about you.

Now we have looked at who could ask to see your credit report, I want explain the two different types of checks that can be carried out on your credit report and which of these might affect your credit score.

Firstly, the soft search. This is a preliminary credit check. It means a lender will search for some information about you but will not see all of your credit report information. These types of credit checks are only visible to you.  You can have unlimited soft searches on your credit report without it having any impact on your credit score. You can see these on your credit report for 12 months. Soft searches include when you check your own report, when your report is accessed for the purpose of an identity check or when a lender wants to show you your eligibility for a new financial product (always check this carefully, to avoid a mark on your report).

A hard search, on the other hand, is when a lender takes an in-depth look at your credit report and associated credit score. This type of credit check leaves a mark on your credit report for 12 months, there are exceptions to this which I will come back to. The prospective lender can not only see what credit you applied for but also whether you were accepted. As previously stated most hard searches stay on your report for 12 months. However a debt collection search is visible for a period of 2 years.

Some of the common reasons for a hard search on your report include but are not limited to:

  • Applications for a loan, a credit card, or a mortgage
  • Opening a new utility account
  • Changing mobile phone contracts

It is important to check with your provider to find out whether they carry out soft or hard checks on your account as a hard search will have an impact on your credit score. However as long as you keep borrowing responsibly, then this impact should only be short term. 

If you make too many applications for credit in a short period of time, this can have an even greater impact on your credit score. Having several hard searches carried out in quick succession may appear to anyone looking at your credit report that you’re desperate for credit, or that you’re suddenly struggling with your current debt. Even though this may not be the case in reality, this makes you appear to be a riskier person to lend to, which may mean you’re rejected for credit altogether, or you’re only offered credit at a higher interest rate.

Frustratingly, you won’t know the exact interest rate or credit limit you’ll be offered until the hard search has been carried out on your credit report, which isn’t at all helpful if you’re trying to avoid making multiple credit applications. There is a solution to this, use an eligibility checker before you apply, knowing which product you are likely to be accepted for will enable you to make smarter decisions about which products to actually apply for and which to avoid altogether. Eligibility checkers only use soft searches so you can do this as often as you need to and some lenders will also show you the credit limit you’re likely to get offered before you apply, which means you can also make applications based on products that you know are likely to give you the credit limit you want.

Originally posted 2020-07-26 15:08:22.

Wendy Tate
The Business Bulletin

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Wendy Tate

Bean Counters is a forward thinking Accountancy practice, specialising in Xero Cloud-Based Software and have been a Xero certified practice since 2014. Whether your business is new or old it needs efficient accounting services for growth and sustainability, we offer an outsourced accounting solution tailored to your needs. So speak to us about your bookkeeping, payroll, VAT and compliance needs.

Credit searches and the impact on your credit score

by Wendy Tate Time to read: 3 min