This article by LoanTube delves into the various elements of a credit check and the steps to undertake when a credit check falls in the picture.⭐Continue reading to know more⭐

In the previous century, banking was manual and needed human involvement in processing things majorly. For borrowing funds, we had to personally approach the responsible official in a bank and provide substantial proof of our financial credibility.

The need for lending and borrowing was a new concept until the second half of that century. So when in 1962, the government eased up the banking system, lending became a widely accepted phenomenon.

Along came the need for examining an individual’s credibility and a credit rating database was needed as well. A credit bureau or a credit rating database is an entity which maintains a record of the financial transactions made by the citizens in a due course of time.

Hence, by the early 1960s, banks began to centralize the customer credibility data from among them. This was done on a small scale and in limited proximity. Yet by 1970s, the situation had changed a bit, few big names started to rise in the field of credit rating and database management. In the upcoming years, they became the cardinal elements of credit rating and checks in the UK, namely, Call-credit, Experian and Equifax.

This is how the element of credit checks was introduced and rating the citizens on their financial expertise came into existence.

Further, this article delves into the various elements of a credit check and the steps to undertake when a credit check falls in the picture.  

What is a credit score?

Fundamentally, a credit score comprises your payment history and the total debt owned (including any outstanding balances and recurrences) by you.

This is further divided into 5 components:

  1. Payment History: Makes up for about 35% of your credit score. The payments that you’re liable to make on time is the prime factor in calculating this number.
  2. Debt Amount: It personates about 30% of your credit score and is the total outstanding debt in your kitty. The more outstanding debt in your name, the worse is your credit score. You should keep the least amount of financial liability on your shoulders. Pay them off first and then seek another loan.
  3. Length of your Credit History: It occupies about 15% of your credit score and is the amount of time since you’ve been borrowing and repaying these credits. This generates a record of your financial habits and that is why a new credit score is not perfect in this regard.
  4. New Credit and Credit Mix: These components contribute 10% each to your credit score. You should avoid handling too many credits on your name at the same time. This indicates a severe need for funds or that you’re in a financial crisis to want these funds urgently. A credit mix, on the other hand, is an uncertain category, it may act as an advantage to your score or it may not. In many cases, handling a variety of debts at once is regarded as a capability to handle these funds efficiently and in other instances, it hampers the situation further. The individuals who handle these responsibly, pose a lesser risk towards the lenders and hence, are more probable to get these loans easily.

What is a Credit Check?

A credit check is performed or initiated by a company or a lending firm, who reviews a credit report to examine your financial behaviour.

As a part of this check, a firm would look into your score for:

  • Whether you’ve paid your credits on time
  • How much outstanding credit do you own
  • The ways in which you handle your debts
  • Any financial associations that you have, a shared account or a shared mortgage; if any

On pro rata basis, they compare the amount of loan you need with your financial credibility according to your credit score.

How do Credit Checks work?

When you apply for a loan, the lender would run a credit check on your profile. An assessment of your credit report before giving out a loan is mandatory as per the FCA guidelines.

Behind The Scenes:

First, the lender would access your credit score from any of the 3 major credit rating agencies in the UK; Experian, Equifax or Call-Credit. Usually, before conducting such a check, the lender would seek your permission to do so. Post-assessment, the lender would decide on the amount of loan to be given and what APR should be levied for the same. You can now choose to agree to this or you may not if it’s inappropriate to your needs.

What do they look at?

A lender looks for the various aspects of your financial tenure. This is an overview of the same.

: To make sure that you are indeed a real person living in the UK

  • Your full name and the D.O.B (Date of Birth)
  • Electoral roll information to confirm the current and previous addresses

: To assess your financial situation and repayment affordability

  • All loans, Credit Cards and mortgages that are open, their start date and the loan amounts
  • All accounts closed in the last 6 years, which is visible in this record
  • Current account overdrafts

: To assess the risks involved in lending to you

  • Previous application searches and footprints
  • Joint accounts with peers (Someone else’s bad credit in your association, may hamper your financial image as well)
  • Any missed repayments and the frequency of such things
  • History of debts, including bankruptcy and CCJs (County Court Judgements)
  • Information on any fraudulent activities linked to your name

How do the CRAs (Credit Rating Agencies) obtain this data?

Reciprocal data: When you make a payment on time or you miss out on it, this data is sent back to the credit agencies by the lenders. Completing the loop of information transfer from both the ends. This is how your record is updated and rotated among these lenders and the credit agencies regularly.

Defining Soft Credit Checks – A Harmless Way to Know Your Loan Eligibility

When a lender or a provider runs a credit check against your loan application, it leaves a footprint in your account and this is visible to other lenders as well. It may hamper your credibility to further extents (in case of a rejected application) and it reduces your score from what was assessed. However, you can opt for a Soft-Credit-Check first, to ensure your loan eligibility and then such an application can be worked upon in a less damaging way. A soft credit check in this way just glances at your profile and does not hamper it any further. It leaves no footprint and a broker or the lender gets a comprehensive view of your financial affordability.

To conclude it, a credit check is a good element of financial protection to you. It’s helpful in assessing your financial habits and to work on the vulnerabilities of your profile. You get a wide picture of your repayment behaviour and the areas of reluctance that you need to focus upon.