Consumer eligibility for credit is being damaged by the way many financial companies check their credit rating when they apply for loans.
It was recently highlighted by the TSB chief executive, Paul Pester, that the cost of a loan is often driven up, not because of a change in the applicant?s financial circumstances, but by the way lenders use credit checks during the application process.
There are two types of credit check that can be used when assessing consumer eligibility for borrowing, soft and hard.
Soft credit checks are designed to be used early in the process at the enquiry stage. For information only they have no impact on eligibility, and therefore leave no mark on the applicant?s credit score.
Hard credit checks on the other hand are designed to be used when the customer formally applies for credit. These hard checks will leave a mark on the individual’s credit report and impact the applicant?s future eligibility.
Multiple marks of hard credit checks on an individual?s credit report can suggest that the individual has unsuccessfully applied for credit from a variety of different lenders and must therefore be a high-risk candidate. As a result, new creditors automatically categorise them as ?higher risk? and therefore apply a more expensive rate.
This therefore means that a consumer could inadvertently be damaging their credit score and increasing the cost of borrowing simply by shopping around for the best product. TSB estimates that this practice is already leading to consumers losing out by up to ?400m every year.
Far too many financial companies are still using hard credit checks initially when the potential client first enquires about credit.
Consumers need to enquire what type of credit check will be used when they ask about obtaining credit from a supplier.
Ensure that a soft credit check will be used initially when first enquiring about credit. Soft credit checks do not guarantee success when later formally applying for the credit, but they do indicate the likelihood that the credit will be granted. More importantly they leave no mark on your credit record, and therefore cannot impact your future eligibility for credit.