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How do credit checks affect credit score?

What really happens when someone checks your file?

Most of us are now aware that getting credit checked has an effect on our credit scores. Every time you apply for credit the company you’re applying for the credit with makes an enquiry. That enquiry is very visible and is recorded in your credit report so that other lenders can see how many enquiries are being made.

Can you stop credit checks from affecting credit score?

No. In fact, you may not even be aware that you have been credit checked. Perhaps one of the most frequent surprise credit checks is the mobile phone provider that carries out an enquiry before entering into a phone contract with you. As there’s rarely much discussion of credit checks with a mobile provider, we may not even realise that is what’s happening. Other credit check situations are more obvious, such as a landlord credit check on a tenant or a lender credit check when you apply for a loan.

Soft credit check

Not all credit checks are the same – and it’s worth clarifying what kind of credit check is about to be carried out, as they can be quite different. The purpose of a credit check is to establish both that you’re who you say you are and also whether you’re a good prospect to lend to. However, not all companies checking your score need all the information in the credit report. Some, for example, will make a ‘soft’ check, which leaves no footprint. This is known as a ‘Quotation Search’ and will provide a brief ‘snapshot’ look at your credit report. Unfortunately, many credit providers go the whole hog and do a full search every time, which can make it difficult to shop around for the best loan deals and may result in your only being able to obtain bad credit loans or relying on a guarantor to help you apply for guarantor loans.

Hard credit check

The hard credit check is the full examination of your credit report that leaves behind a record that a lender has been there. Expert research provided to the lending industry has shown that opening multiple credit accounts in a short space of time can be an indicator of a real credit risk. Statistically speaking, there’s evidence to show that someone with six or more enquiries on their credit report is eight times more likely to declare bankruptcy. This is why lenders can be put off by a borrower who has a lot of recent hard searches on their report.

What impact does this have?

Basically, your credit score can be reduced every time an enquiry is made against you. The reduction varies but some credit agencies will drop this down by 5 points for each enquiry. The impact that this has depends on what your credit score is to start with. If you have a relatively high score, a long history of good credit then it really may not make that much difference. However, if you’re struggling with a less than perfect score, or you have a ‘no credit score’ situation, then this could be problematic. Either way, it pays to be aware of the different types of credit checks and try to steer clear of the hard check as much as you can.