There's a new way to avoid black marks on your credit record.
When it comes to finding the best personal loan rate the smart advice is always to shop around. But did you know that doing just that can have a detrimental effect on your credit record?
When banks and other providers advertise loans they show a “typical APR”. But in reality, only about one in five applicants ends up with the rate as all applicants will have their credit history checked out before being offered a loan rate.
Footprints
What normally happens is, consumers have to go through the application process to see what personal loan rate they will be offered. This means lenders perform a “hard search” on their credit record to get all the information they need to make a decision.
In short, they treat each request for a quote like a proper application. This leaves what’s called a “footprint” on the credit record searched. This footprint can be seen by anyone – for example, other lenders – who search your record later.
Problems can occur when you apply to several lenders for a quote or credit in a short period of time. This leaves a number of footprints on you record which in turn deter lenders from offering you loans at a decent rate, if at all.
This is because the majority of lenders view multiple footprints as a sign of financial stress - which didn’t used to be such a problem. But nowadays, in the current economic climate, this makes you an unattractive borrower. Numerous applications in a short space of time can also be a sign of fraud.
If you’ve got a perfect credit history, it’s unlikely you’ll be turned down for a personal loan on the strength of footprints alone, but they can make all the difference if other information on your application means you’re already a borderline applicant for a loan.
The good news is footprints become less important as time goes on. As the searches get older, say three months, the impact on an individual’s credit rating starts to diminish.
Soft quotes
However, not all lenders perform hard searches on your credit record. Nationwide, for example, only performs a “soft quote” which doesn’t leave a mark on your credit record. This means you can find out what APR the building society would offer you without worrying that doing so will deter lenders from lending to you in the future.
Nationwide tends to offer some pretty competitive loan rates so it’s often worth a try if you need to borrow money.
Another lender that offers soft quotes is peer-to-peer lender Zopa. It will perform a soft quote in order to tell you what APR it can offer you which will enable you to compare its rates against other lenders.
The only people/organisations that can see a soft quote on your credit history are the organistion that performed the search (i.e. Nationwide or Zopa) or the borrower themselves if they check their credit file.
Check your credit record
If you are turned down for credit the first thing you should do is to ask why. If lenders tell you your credit report had a significant impact, you can check it with one of the three credit reference agencies: Experian, Equifax or MyCallCredit.
You can get a free credit report from Experian, to help you work out exactly where you stand. Just remember to cancel your membership before the 30-day trial period is up, to avoid being charged in the future.
There are numerous ways to improve your credit record in some circumstances but some people with a genuinely less-than-perfect record will find they are blocked from best buy loans and credit cards. It’s a good idea to know this before you start making applications because, as explained earlier, multiple quotes and searches in a short period of time can make your situation worse.
Once you’re armed with all the information contained on your credit report you can limit your credit applications to ones that are more likely to be accepted.
Protect yourself
Checking your credit record can have other benefits too. For example, if it lists searches you don’t remember making then it’s possible someone is trying to obtain credit in your name. If this is the case you can get a “CIFAS Protective Registration” For a small fee, a warning will alert most lenders to the fraud so that they can take extra care when dealing with credit applications in your name.
More: What really damages your credit rating | Credit reports explained