Loans Section

Applying For a Loan? Too Many Applications Can Effect Your Credit Rating - Find Out More

August 2006

Shopping around is often the best way to get better value or cheaper goods and services but not when you want a personal loan. This article looks at why this is so and if there’s anything you can do about it.

It’s All About Your Credit Rating

If you’ve got (or have ever had) a credit card, mortgage, hire purchase agreement, loan, mobile phone contract etc then you have a credit rating. This measures your past history of borrowing and repayment and tries to give financial institutions an idea of you overall credit worthiness.

For example, if you’ve always paid your debts on time and never defaulted then chances are you’ll have a pretty good credit rating and have no problem getting further credit. But if you’re a chronic late payer and/or have defaulted or had CCJs lodged against your name these will appear as black marks on your credit file. At worse you’ll be refused credit and at best you’ll have to pay high rates of interest.

Credit Application Footprints Are Bad Footprints

Whenever you apply for any sort of credit the financial institution will normally check your credit file as to whether you’re suitable
When accessing you credit file a 'mark' or 'footprint' will be left on your file, sort of like a calling card
This in itself is not a problem and is no cause for concern
But if you rack up many of these 'footprints' over a short period of time this can lead to a worsening of your credit file as you might be viewed as desperate for money
Remember a lender will also use your credit file to see what current debts you have - so if they see 4-5 new credit search footprints with no credit granted they might take the view that other lenders have said NO which may or may not be the case
Search footprints stay on your file for a year

Remember, these credit files are pretty black or white and are often ‘read’ by computer programs which obviously cannot think logically. They therefore have no real way of knowing the real facts behind each entry etc. This is why shopping around for the best loan rate can actually damage to your credit rating.

Why Do Financial Firms Do This

Many of the banks have stopped advertising their loan rates because they have different interest rates for different people, they so call credit-score all their loan applicants. For example, if you’ve been a late payer on numerous occasions in the past and apply for a £3,000 loan with the ABC bank you might be charged an interest rate of 7.9%. But if your friend has a squeaky clean credit file they might be charged 5.5%

So the bank can't know which rate to quote you until its searched your credit file

Is There Away To Get Around The Problem

Many financial commentators suggest that whenever you apply for a loan you ask the financial institution for what’s called a 'quotation search' rather than a 'credit check' which is what they all do now. A quotation search is really exactly the same as a credit check (the firm in question reads and analyses your credit file) but DOES NOT leave a footprint of the search on your credit file.

So that’s it then - Ask for a quotation search. Sadly NO because recent research has shown that most if not all the call centre workers who approve/disapprove these loans have no idea what a quotation search is and therefore don't offer the facility.

Quotation searches are generally new though so maybe over the next few years more banks and financial institutions will offer them to their customers. But for now don’t rely on this trick.

The two ways we recommend that you try and get around this problem of footprints are -

Be realistic - Get a copy of your credit file and see what it says (see this LearnMoney.co.uk link for more information). If you’ve had late payments and/or defaults/CCJs against your name you are not going to get that loan from the XYZ Bank at 5.9% so it’s pointless calling them
Do business with a company that will quote you an accurate interest rate before you actually apply for the loan -

Companies like Nationwide Building Society, Egg, First Direct and Morgan Stanley all do this - However, there is still a chance that you’ll be rejected after you apply but this is not as bad as having 4-5 credit searches against your name.

Summary

Notification searches are pretty much a waste of time because few if any financial institutions understand what they are. To combat the problem of having many credit search marks on your credit file understand what sort of risk you are. This can only be done by inspecting your credit file (and speaking with the credit agency helpline when you receive it if you’re unsure what certain inputs mean) and realising that if good you or bad there are certain avenues open to you.

Good Rating - You’ll have a chance at getting the cheapest loan available so go for one of the best buys

Medium Credit Rating - No Defaults or CCJs but a few late payment entries - don’t waste your time going for the Best Buys, instead contact a company that offers an interest rate before the loan application process

Bad Credit Rating - Again, zero chance of getting a cheap interest rate. Either go with one of the firms listed above who does not use a credit scoring technique to determine the interest rate or perhaps look at other ways to borrow money , perhaps by increasing your mortgage. But on this topic be very aware of those debt consolidation companies who advertise on Sky TV because their loans are incredibly expensive and very very inflexible, far better to talk to your present mortgage company or bank.