MoneyMagpie Editor and financial expert Vicky Parry warns about the problems a hard credit search can bring
Do you know the difference between a ‘hard’ and ‘soft’ credit check? Being unaware could significantly impact your ability to get any line of credit.
When people talk about ‘credit’, we often assume credit cards. But it actually means all kinds of things: loans, overdrafts, car finance, store cards and buy-now-pay-later are the main types. If you don’t know whether you’re about to receive a hard or soft credit check, you could inadvertently be impacting your credit score.
Even if you live within your means, your credit score is important as it impacts your ability to get a mortgage or rental agreement, loans for particular things like car finance or home improvements, and even whether you can get a phone contract.
Hard credit searches explained
A hard credit search is when a lender needs to confirm that you can afford their product in order to complete the transaction of giving it to you. This could be a bank account, car finance, a new mobile phone contract, a credit card – any type of credit.
This search will show on your credit history. If you fail to pass the credit check, because you don’t meet affordability requirements after all, this will impact your credit score. Failing multiple checks in a short space of time, such as a few months, will continue to negatively impact your score. So, if you fail once, wait several weeks before applying for any further type of credit.
What is a soft credit search?
A soft credit search is when a company needs to check your identity and basic information to offer you options that you could be able to receive. (If you then select a product, such as a credit card, a hard search will be completed).
A soft search will also be done if you do things like compare car insurance quotes online, or your home insurance. This is why you might check your credit history and see several companies conducting soft searches in a short space of time – don’t panic!
Any soft search on your credit record will not affect your ability to get credit.
Why a good credit score is important
Most of us will require a line of credit or a good credit score at some point. Credit scores are used to determine if you’re a reliable spender and won’t rack up debt that a company has to write off. And by debt, it’s not just using a credit card!
For example, if you need a mortgage, the lender needs to know that you will be able to afford your monthly repayments as well as reasonable adjustments in the price (such as interest rate changes).
However, it can also impact much smaller day-to-day things. A low credit score could mean you’re unable to open most current accounts at a bank, for example. While most banks now offer a basic current account, which does not allow any overdrafts or offer extras, you won’t be able to access other options. For example, if you want to access a current account because it also offers a high-rate regular saver account, you may not be able to do so if your credit score is low.
Why is my credit score low?
There are several reasons you have a low credit score. And some of those reasons might surprise you!
The most damaging reasons include debts. If you haven’t paid your credit cards or loan repayments on their due date, this will impact your score. If you’re declared bankrupt or choose to take on a Debt Management Plan or Involuntary Insolvency, this will also significantly impact your score.
However, you can also have a low score even if you’re financially stable. People who never or rarely use credit will find it tough to build a score, as lenders haven’t got a picture of your ability to repay them responsibly. You might be a millionaire, but if you don’t have a credit card or a phone contract or similar, you’re not ‘reliable’! It’s a strange system.
That’s why, even if you are financially stable, it’s important to build some credit history. This could be taking out a credit card to use for fuel or groceries and paying it off in full each month. Having a high score protects you against unforeseen financial events in the future: for example, if you suddenly lost your income due to redundancy or illness, a good score will mean you can access credit to see you through until you recover.
You could also have County Court Judgements against you for things you’re unaware of – such as unpaid parking fines sent to a previous address. This is why checking your score is so important.
How to check your credit score
There are three credit agencies that lenders use to determine your credit score. Make sure you check all three of them – it’s free to do so – because they each have slightly different information, score systems, and lenders using them.
Register with Equifax , TransUnion (Credit Karma), and Experian to check your score. Make sure you check it periodically, too. This will ensure you can spot potential problems, or even fraud, if it looks like there is an account opened in your name that you aren’t aware of.
Quick tips to improve your credit score
If your credit availability is worse than you’d like, there are some things you can do to boost your credit score .
- Register on the electoral roll if you haven’t already
- Avoid applying for any lines of credit for a few months
- Use a system like CreditLadder to make your rent payments count towards your credit score reports
- Challenge any defaults or unrecognised addresses or associations on your credit report
- If you struggle to apply for credit, opt for a credit builder card like Aqua (keep the limit low and beware the very high interest rate – always pay in full each month)
- Make sure closed accounts are really closed and not marked as defaulted
- Keep your existing credit usage to between 10-20% of your total available limit if possible, or at least reduce as much as you can.
These should help improve your score over time – but be patient, as it can take a while.
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