How Does a Credit Check Work?

Abstract pen writing credit application

If you are applying for a loan, mortgage, or any other form of credit, it is likely that one of the very first steps that will be taken by any you apply with, in order to determine whether to approve or decline your application is looking at your credit history. This is done by the lender carrying out a credit check. Whilst some brokers will carry out credit checks, it is often the direct lenders themselves that carry out a decisive credit check to make an informed assessment as to whether or not you are suitable for the loan being applied for. But how exactly does a credit check work, and how are credit reference agencies connected to them?

What is a Credit Check?

In order for lenders, to carry out a credit check on you, they will need to access your financial history, which can be obtain from an of the three main credit reference agencies in the UK: Experian, Callcredit and Equifax. A credit check reviews a person’s financial situation and history and determines a person’s eligibility for a loan. this includes almost any loan you may consider taking out, from online payday loans to mortgages.

What Can Be Seen on a Credit Check?

In terms of the information a lender will see if a credit check is carried out (or alternatively, if you decide to obtain your own credit report, which is also possible, and you will both receive exactly the same details) the following will be included on your credit file:

  • Your full name
  • Date of birth
  • Current address as well as previous addresses you have lived at
  • Any open accounts for mortgages, loans or credit cards (included in this section will be the amount you requested to loan, as well as when these accounts were opened)
  • Joint accounts you have open
  • Accounts closed in the last six years
  • If you have a history of CCJs
  • Bankruptcy

What Happens Next?

Once a lender has access to a person’s file, they will run a credit check and receive a person’s credit score which can range from 0 (a very poor credit score) to 999 (an excellent credit score.) It is worth noting that each credit reference agency uses different metrics in order to determine your credit score, as they all assess slightly different criteria. These are the credit rating systems each of these reference agencies use, and what is deemed to be a good credit score by each of them:

  • Equifax: a rating of at least 420 out of 700
  • Experian: a minimum rating of at least 880 out of 999
  • Callcredit: a rating of at least 4 out of 5

Based upon the score you receive, you will either be approved or declined for the application of credit that you have made, as your credit score is used as a barometer of how ‘creditworthy’ you are, ie. the likelihood that you will be able to make full repayments on any amount borrowed to you.

How Do I Find Out My Credit Score?

It is thoroughly recommended to check your credit score with one of the three main credit reference agencies prior to make an application for credit, as it will enable you to determine if there are areas for improvement (it is important to note that your credit score does not remain static, and can improve or worsen over time) before deciding to apply for a loan. You should check your report on a yearly basis. Some people find themselves having to turn to specific bad credit loans due to their poor credit scores, so it is important to check your before you apply for any loan. This will help ensure you are as well informed as possible prior to applying.

You can check your credit report online, or by post. Some credit reference agencies provide you a basic credit report for free, but you can also access your statutory report for as little as £2. If you are actively trying to improve your current score, you could also look at signing up to a credit report subscription service, where you receive regular updates as to the status of your credit report.

Can I Change my Credit Score?

Although you are unable to directly 'change' your credit score, there are a number of ways in which you may be able to improve your credit score for the future. The major benefit of doing this is that should you successfully improve your score, you will make yourself a much more appealing lending prospect for lenders of loans and credit in the future. By demonstrating positive financial behaviour, alongside various other supplementary practices, you could open up increased opportunities when it comes to credit, mortgages, loans and even day to day credit-related products such as mobile phone plans.

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