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Increasingly, financial services companies are offering the option to conduct a soft search or “smart search” to establish your chances of being approved for a loan or credit card. If you’re not sure what a soft search is, then you’re not alone. Here’s our ultimate guide to soft searches for credit, and the reasons why these could be important for you.

Credit Score

Perhaps the most important thing about soft or smart searches is that they will not leave any mark on your credit file, unlike a “hard search” which is an actual application for credit. If you are turned down by one lender, this can make another lender less likely to accept you too. The more searches you do, and the more often you are knocked back, the harder it gets to obtain credit. Even if your credit score is healthy, a soft search could stop you applying for products which just aren’t designed for people like you.

Most of us when comparing financial services products such as credit cards or mortgages default to the provider with the lowers interest rates. The problem is that those products which offer a very low interest rate are generally only available to people who have the best credit scores. By applying and being rejected, the failed application will be logged on your file and make it harder to get other finance approved.

How Does a Smart Search Work?

Many sites, especially the large comparison sites, offer tool which is often marketed as an eligibility checker on their websites. Typically, you will be asked to input a few basic details such as your name, address, date of birth and what you do for a living. The information is then used by a credit referencing agency for a soft search. Usually, the results will be reported as a three-digit number, which is your credit score. The website can then suggest which products you might be more likely to be accepted for and will filter out the ones which are not right for you. Every site is different, but you will probably see a mark out of ten, or a percentage result against each product. A high score such as 8/10 or 95% indicates that you have a good chance of acceptance.

Soft searches aren’t an absolute guarantee though, so there is still the chance you may be rejected when you click through to the lender and make a “hard” application. Each lender has their own rules for making a loan and will look at not only the information on your credit file but also the information you have given on your application form to make a decision. The criteria for lending change regularly, and frustratingly, the lenders don’t have to give a reason when they reject you for a mortgage or credit card.

Increase Your Chances of Acceptance

As well as conducting soft searches to maximise your chances of being accepted, it’s also a good idea to understand your credit score and monitor it regularly. Lenders want to see you as a good risk, someone who will pay up on time, in full, and wont default on the agreement. Doing things like closing dormant accounts you are no longer using will have a positive effect on your rating, as will paying off old debt and getting into the habit of never missing a payment on any loan or credit agreement. Sometimes, the reason people are rejected is that there is a mistake on their file. If that applies to you, then you have the right to have it put right. You will of course need the paperwork to prove the mistake though.

If 2022 is the year you are planning to move house with a new mortgage, take out a loan for a new car, or think about taking 0% finance for a new kitchen, then it’s important to make sure your credit score is both accurate and in good shape. All of the big three credit referencing agencies in the UK have some sort of membership plan which gives you access to their files, but this costs money. One option is signing up for one of the four-week free trials to check your file, as long as you remember to cancel within the free period. But there are other ways to get access to your credit report without paying money to do so.

The three main credit scoring companies in the UK are Experian, Equifax, and TransUnion. You really should look at all three as all may contain different information, and you probably won’t be told which agency a lender will be using when you make a credit application.

Experian

Experian will let you create an account and check your credit score free of charge, but you’ll have to pay for access to the full report first. One way of doing this is by taking out the 30-day free trial option to look at your file to make sure there are no basic errors, and then just periodically checking your score to make sure it’s staying the same or improving.

Equifax

Equifax produces the “Clearscore” app, which you can download for Android and iPhone devices. It’s free to check your score and get access to your Equifax credit report. This is perhaps the most user-friendly app around in the credit checking market and has been designed to be easy to use.

TransUnion

Similar to Equifax, TransUnion (which was previously known as Callcredit) has an app and website called Credit Karma which you can use to check your credit record and score. This works broadly in the same way as Clearscore, and there is no reason why you can’t download both onto your smartphone or register with both the websites.

Why Should I Check My Credit Score?

Mistakes on your credit file could cause problems for you if you apply for credit, so it’s important to check that your file is accurate. Keeping an eye on your file on an ongoing basis will alert you to changes; if your credit score number suddenly starts dipping, then you can look at why that might be happening. Your file will show you where you can “clean up” the information about you, and some of these actions can improve your credit score too. This includes things like closing accounts which you are no longer using, and check that there are no defaults on your file which shouldn’t be there. If you think your credit record is being adversely affected by having a joint account with someone who has a poor credit record, then financially separate yourself from them and make sure the credit agencies are aware you have de-linked from them.

Checking your credit record doesn’t affect your score and won’t be recorded on your file in the same was that it is when you apply for credit. It won’t go against you if you check every day, or even every week. But that’s probably a little excessive. Get into the habit of checking monthly, and if you see any sudden dips in your credit file, dig a little deeper into the detail. If you do discover something amiss, search on the website of the organisation concerned for details about how to contact them and put it right.

For an individual to be creditworthy having a good credit score is critical. The credit score is evaluated based on your credit history. The better the score the more lenders will feel comfortable issuing credit. The credit score is calculated by credit reference agencies with three operating in the UK -TransUnion, Equifax and Experian.

When calculating the credit score, credit reference agencies evaluate the following factors:

The length of credit history

For those that have a long credit history there is more data available for lenders to judge the risk factors. Those individuals that have lengthy credit histories and have paid on time will have higher credit scores. People with relatively new credit histories are more unlikely to be considered by a lender as trustworthy enough especially for large sums of credit.

History of payments

The primary concern of any lender is the repayment of debt on time. For this, they check the payment history of the individual applying for credit. Creating a consistent payment history by paying regularly is essential. Using a credit card periodically can benefit as it helps to build the credit history. Contrastingly, not taking loans or not using a credit card will not build a strong credit history and it will not help to grab the best interest offers or other deals available to those with a positive credit history.

Hard credit vs soft credit search

Each time you apply for fresh credit or look to increase the limit it can impact the score. Using a comparison site to compare credit from different lenders within 45-days will show as a single search. Hard searches lead to the credit score dipping by up to 5-points and remaining on the report for around 2 years. Soft searches on the other hand do not impact credit scores.

Usage of credit

The amount of credit used is also taken into account by lenders. Using less than half the available preferably 30-40% is considered ideal. The lesser the percentage of credit used the more interested will lenders be to give loans as it shows the individual uses their credit judiciously. It raises the creditworthiness of a user.

Kind of credit

The more the different types of credits in use e.g., mortgages, revolving credit, personal loans etc. and paying on time will result in higher credit scores. This boosts the creditworthiness of the borrower.

Lenders take all of these factors into account when deciding to extend credit. When an individual applies for a line of credit, the lender has to ensure that the person is creditworthy to extend the line of credit. It is just not the overall credit score that they will look into but also consider factors like spending and income.

For this, they need not necessarily depend on the credit report and score from a single agency but may also decide to look at the information available with the other two agencies also. Each lender has their unique criteria to be met before they decide to extend a loan to an applicant.

Keeping track of your credit report is essential to ensure you remain creditworthy at all times. Like we check our bills and bank statements every month, looking at your credit report and ensuring things are on track will help to get the best deals for credit cards, mortgages and loans etc.

We look at some of the main factors to maintain a healthy credit report like:

History of payment

The payment history must reflect accurately as it has a direct effect on the credit score. The payment history shows all the payments made whether they were on time, in part or full. Any defaults or missed payments will also show in the credit history. However, the history of payments may not always be the same as the statement which is because lenders report the payments at different times. Any payments made that do not feature in the history should be checked with the lender as it would lower the credit score.

Hard vs Soft searches

There are two types of searches carried out by companies Hard/ Soft search. Hard searches are done by companies when an individual applies for credit and is generally in-depth and impacts the credit score negatively.

A soft search is mostly done by an individual to know their credit score or by a company to see if the applicant is eligible. A soft search will show up in the report but is not visible to lenders and does not affect the credit score.

It is necessary to check if any hard searches feature on the report (if you have applied for finance). If you have not, you could contact the lender to remove the error or it could be checked for fraud as well.

Soft searches constitute personal and quotation searches with the latter used to check eligibility for products and lower interest rates.

Check the accounts

Examine the report for the accuracy of the accounts. Apart from the mortgages, credit cards, current accounts etc. there also must be certain utility and mobile phone bills etc. The accounts can have a direct impact on the credit score. If any account is inaccurate or does not seem to belong to you get in touch with the lender and have the issue sorted out at the earliest so that it does not negatively impact the credit score.

Financial associates

If you have applied for joint credit with anyone those associations need to be carefully monitored from time to time. All such financial links must be up to date and accurate. Having a financial association with anyone will result in their financial history having a direct impact on your credit report as well. If you have applied for credit, the lender might search your associate’s financial history. If they find anything unsatisfactory in the associate’s track record, the lender might reject the credit application despite your credit history being clean. If anything is inaccurate it should be reported to the lender without delay.

If you are facing bankruptcy, having a CCJ or default showing on the credit report it will impact the credit score considerably. We look at these issues in this blog and how they can be handled.

Bankruptcy

A person is considered legally bankrupt when they are no longer able to repay their debts. When a person declares bankruptcy, they are declaring legally that they are no longer able to clear their debts. Upon bankruptcy, any unsecured debts are written off. This is generally the last option because assets like a car or house could be sold to clear debts. There are two ways of going bankrupt. Either when a creditor you owe £5,000 or more cannot come to an agreement to repay or it is done voluntarily by the borrower.

A bankruptcy shows up on the credit report for 6 years with lenders paying less attention to it over time.

In case of bankruptcy, there are restrictions for 1 year that have to be followed. There may be a need to make monthly payments from any other income source known as IPA (Income Payments Agreement) for 3 years. After the bankruptcy is discharged an individual needs to rebuild their credit history over time.

CCJ

The full form of CCJ is County Court Judgment and is a legal order to a borrower to repay any outstanding debt. These are issued if an account is declared as a default by a lender that can then get a CCJ to ensure their debt is repaid.

CCJs remain on a public database i.e., Register of Judgments, Orders and Fines and a credit report for 6 years. If the full amount is cleared in 30 days, the CCJ can be removed from the credit report and changed to ‘Satisfied’ on the public register. Having the CCJ marked as ‘Satisfied’ increases the likelihood of lenders being okay to lend credit. Over time lenders pay less attention to CCJs.

If a lender takes legal action and a county court form is received take immediate action as the response must be within 14 working days.

Default

Missing debt repayments for a certain number of times (it differs between lenders) will lead to a default. When an account is declared as default it shows the lender is sure the debt is not going to be cleared. They can then take legal action for repayment of the debt. As mentioned, the number of payments permitted to miss vary with some lenders allowing only 2-3 while others permitting as much as 6 payments. Once an account is under default status it appears on the credit report and impacts the credit score extensively.

The default status remains on the report for 6 years even in case of repayment of debt. While it affects creditworthiness over the years lenders may focus on it less.

Before an account is declared default, a notice is issued to the borrower with the sum owed. If paid within 14 days things will continue as usual If not it will be declared default. In case of default, there are organisations in the UK like National Debtline or StepChange for free advice and a possible repayment plan.

If you intend to apply for credit you need to ensure that your credit score is in ship-shape as that is what banks and lenders look at first before deciding to give credit. For an individual to be eligible for the best offers have a robust credit score is paramount. In this blog we look at what constitutes a good or bad credit score.

Understanding a credit score

When you apply for a loan, mortgage or credit card, the bank or lender checks the credit score to decide if the applicant is eligible. The credit score is calculated as per an individual’s credit history and the way they have handled their finances over time. Using the credit score the bank or the lender can evaluate the credit risk.

Calculation of credit score

A credit reference agency has the task of calculating credit scores. In the UK there are three agencies TransUnion, Experian and Equifax. Lenders send the financial information of creditors to every CRA. Additional information including court judgments and records are shared as well with the CRA’s and collectively they constitute a credit report.

Good vs Bad credit score

No credit score can guarantee credit from a lender as there are different criteria taken into account by banks and lenders when issuing credit. While some may not agree to issue credit, others might consider it. While having a good credit score is essential to prove creditworthiness there are additional factors evaluated before a lender decides to issue credit.

Factors that impact the credit score

Some of the factors that impact a credit score negatively include:

• Frequent credit applications.
• Bankruptcy, court judgments and defaults etc.
• Using most of the available credit.
• Changing your home address frequently.
• Missing payments or regular late payments
• Errors on the report.

Having a high credit score

Whether you need a mortgage or plan to apply for a new credit card, a bank or lender will scrutinise your credit score first. Any lender will look to lend only to individuals that are a low risk so that they can be assured of their repayment. The benefit of having a high credit score is that it indicates an individual is of low risk that makes the lenders more confident to lend to such applicants. Making repayments on time will show reliability on part of the borrower.

Those that have high credit scores are more likely to have their credit applications accepted. Added benefits may include a higher credit limit and attractive interest rates.

Individuals that have low credit scores

Those that have been missing payments or defaulted will find their credit scores to be on the lower side. Having a low credit score increases the risk of being categorised as high risk and lenders are more unlikely to reject credit applications. Even if they do agree to lend credit it will be at a much higher rate of interest or they might outright refuse to give any credit altogether.

Not many credit card users are aware that their credit utilisation has a considerable influence on their credit score. If you have multiple credit cards that have their credit limit mostly used it reflects that you are not able to manage your finances and will negatively affect the credit score. However, if you use the credit limit prudently i.e., just a limited amount of credit, it could have a positive impact on the credit score. The higher the credit score the better deals you can get on mortgages, credit cards and interest rates etc.

What is credit utilisation?

The amount of credit used from the limit is termed credit utilisation. E.g., from 100% if you use 50% it would be your credit utilisation.

How much credit should be ideally utilised?

Limiting your usage to 30% of your credit limit would be most suitable as it indicates to the lender that you are managing your finances well. If you show more than 50% usage of the credit limit it may affect the credit score. Those using above 75% will further impact the credit score. Those that exceed the limit will also have their credit score lowered and have to pay a surcharge. While trying to ensure to limit your credit utilisation is necessary, care must be taken not to neglect using it altogether. If the credit card is not used it will not contribute to building a healthy history of credit. All lenders examine an applicant’s credit card history to check their creditworthiness. To have healthy credit using the card regularly but prudently is necessary.

Ways to limit credit card spending

One of the easiest ways to limit spending is to know the credit limit of each card you have. Looking at your spending history the credit card company might raise your limit (although they must inform you). Keep track of the credit limit and the amount spent on each.

The easiest and most obvious way is to limit spending on credit cards. If in a situation there is a need to spend more than 30% there are a few options available.

• Ask for a raise in the credit limit while ensuring not to overspend.
• Use two or three cards to make purchases instead of using a single card.
• Consider the option of applying for a new credit card. However, keep in mind it will lower the credit score because of a hard search.

Finally, limiting your credit limit usage will help in the long term in many different ways. The way you use your credit limit has a direct impact on your credit history and eventually your credit score. In case of a late or missed payment, it can take a long while to improve the credit score. That is where prudent utilisation of your credit limit helps to a considerable extent to keep the score healthy. Having a high credit score will translate into benefits like the best interest rates, zero interest deals, lower interest rates charged etc.