Do you know when a credit check is done? In the majority of cases, a credit check would only be done with your consent, but are you agreeing to a credit check being done without realising? Do you understand the impact of making a credit application and what it could mean to your credit history and score?
A study conducted by NOW FINANCE revealed that 40% of consumers who have taken out a loan in the past five years had no idea whether or not a credit check was done when they made an enquiry.
When is a Credit Check Actually Done?
There are numerous occasions when a credit check might be conducted.
In general, when you apply for credit, lenders are looking to understand whether you are likely to be a reliable borrower. At present, this means they’ll see your credit score, and whether you have any defaults or other credit infringements. With Comprehensive Credit Reporting (CCR) that has been made mandatory for the big 4 banks and optional for other finance providers since July 1 2018, lenders have access to much more information related to your credit use and behaviour than ever before.
A credit check will be completed if you apply for the following:
- Personal loans
- Credit cards
- Payday (or other short-term) loans
- In-store finance
- Mobile phone contracts
Utilities providers may also check your credit score prior to offering you specific account options.
It is important to understand that the credit check is generally completed the moment you apply. If you give a lender a call to discuss a loan, for example, then you won’t be credit checked. If you ever deal with a broker to help you find a finance product, they will usually not conduct a full credit check, but if they intend to, they must have you sign a Privacy Consent form specific to making an enquiry on your credit file.
What Impact Does a Credit Check Have?
Every time a credit check is conducted, it influences your credit score. In many cases, the credit check will have a negative influence. Each of Australia’s credit reporting bureaus uses an algorithm to generate your credit score, and a credit check will influence the algorithm and thus your score. Depending on how the specific credit bureau calculates your score, and the weighting given to credit checks within the algorithm, will depend to what extent your score reduces.
Not every credit check will have an equal influence. If you apply for a personal loan today, for example, this application and check, in isolation, will only have a negligible impact on your credit score. If you then apply for another credit product in nine months’ time, then again the impact is likely to be small.
However, if you apply for a personal loan today, a credit card tomorrow, store finance next week, and another loan by the end of the month, this will have a hugely negative impact on your credit score. Having multiple applications for credit on your credit report is a common sign of financial distress. As such, in the eyes of a lender you may appear to be more of a financial risk. As a result, if you are looking for a personal loan or a credit card, it pays to check your credit report – which you are entitled to do at no cost – and to ensure all the information held is correct, before applying. It is common for people who need a personal loan or another credit product to continue applying following a first decline, which only makes their chances of being accepted lower.
What Does This Impact Mean for You?
How can having excessive credit enquiries on your credit report impact you?
- As it reduces your credit score, you could find yourself being declined for credit.
- Even when you are accepted for credit, you may find that you are only offered higher interest rates given that you are perceived to be a higher risk.
CCR participating lenders are able to see all your recent applications for credit as well as your credit score, so be sure to only apply for credit when you need it.
Discovering What You Can Before a Credit Check Happens
Some lenders, including NOW FINANCE, offer you the opportunity to get your interest rate and tell you whether you qualify for a personal loan prior to a credit check being made. Such opportunities are great for consumers, as you can enjoy the transparency of knowing what your interest rate will be before you apply for a loan and prior to a credit check being conducted. You also avoid situations where you might see an advert for a personal loan and be attracted by a low interest rate being advertised, only to be offered a higher rate once accepted and feel like you have no choice but to accept.
Understanding When Credit Checks Are Done
Protect your ability to access credit when you need it by only applying:
- When you definitely need credit.
- When you have checked your credit file and are happy that everything that credit bureaus will see is correct.
Ensure you are always aware when a credit check will be completed, and where you can use lenders and credit providers who will tell you your interest rate before you apply.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.