Credit is very important to personal finance. Not only can credit allow people to purchase everything from homes to shopping, it also helps manage money problems better during tough times. Instead of using money directly from your current account, using credit allows you to pay off debts when money is more readily available.
In the UK, consumers have already borrowed around £1.2 billion in net consumer credit this year. In 2020, around the time of the COVID-19 pandemic, gross credit card lending numbers fell, mostly because of lockdowns and social distancing so people used credit less. However, borrowing climbed the following years and continued to climb with the rise in spending partnered with job losses, especially in the hospitality industries.
As people become more reliant on borrowing, it is important to understand about credit, especially if you are thinking about borrowing from a lender.
Quick facts about your credit
Information about your credit is held by companies called Credit Reference Agencies or CRAs. Three CRAs – Equifax, Experian and TransUnion – hold information reviewed by lenders before deciding to offer a loan.
The information in your file includes those needed to confirm your identity, as well as data about how you earn and use money. Your file may contain reports about bankruptcies, court issues, current unpaid balances, and even credit checks or inquiries.
What are credit inquiries?
If you apply for a loan or credit, the lender like the bank or store will check your credit file to see if you are a good candidate for approval. They will run a credit inquiry from any of the CRAs and these searches are recorded. Although a search per se should not affect your credit, having too many inquiries in a short amount of time raises red flags to lenders, showing that you might not have been able to get credit multiple times already.
Recorded credit checks can stay on your file and affect future applications. The length of time these stay on your file however, depends on the type of inquiries done.
How long do inquiries last?
Firstly, it is crucial to understand the difference between hard vs. soft credit checks. Simply put, hard credit checks affect your credit and soft credit checks do not. Hard credit inquiries require your permission and are usually done by lenders when you apply for a loan such as for a mortgage, car loan, or credit card applications. Soft credit checks are those not tied to a credit application, and are often done without needing your permission. These include insurance and card prequalification checks and your own credit monitoring.
While financial account information such as loans and bankruptcies can last up to six years on your file, credit inquiries or searches stay visible usually one to two years depending on the CRA and what type of search. On Transunion and Equifax, soft searches are visible on your personal report usually for one year, although this is not visible to any lenders when you apply. Transunion hard inquiries stay on your report for two years. Credit qualification searches done through Equifax are visible to companies for one year, while debt collection searches remain for two years. For Experian, most hard searches stay on your file for one year.
Minimising credit problems
Since credit inquiries stay on your report for a while, it is best to control how many hard or soft credit inquiries will be made in your name. Avoid applying for credit, thus initiating credit checks, many times in a short span of time. Aside from these, also remember to minimise your existing credit. These can be done by controlling your spending, budgeting, making regular payments, and consolidating your debt. The less you owe, the less likely a lender will deny your application after a credit check, and the less attempts you have to do at applying again and triggering another credit check.
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