How Do Credit Checks Work?

Every time you apply for credit or insurance, the company you approach checks your credit file to determine how much of a credit risk you are. Your credit file contains information about how much money you owe to other lenders and how you've managed your accounts. When you apply for new credit, the provider runs a credit check to see if you meet their lending criteria.

Application

When you apply, you submit detailed personal information about yourself, and anybody else you're financially linked to if you're making a joint application. You'll need to supply any previous names or aliases you've been known by and any previous addresses where you've lived. You'll also need to submit details about your income and any outstanding debt you have if you're applying for credit.

Lending Criteria

Once you've applied, your details will be checked electronically with credit reference agencies. Financial companies use a complex formula to assess your eligibility which is, in the first instance, fully-automated. Your credit score, how much money you owe and how you've managed your existing accounts will be used with the information you submitted in your application to decide whether you qualify. You may be turned down for credit even though you have a good credit score due to a company's lending criteria. If you have an excellent credit score, but the company you've applied to can see that the loan may take up most of your disposable income, they're likely to turn you down.

Decision

The result of a credit check, in most cases, will be available within seconds. If you're applying in a store, you could face the embarrassment if the sales staff says your credit check has been turned down. If you make an application online, some companies prefer to write to customers that have failed a credit check with the bad news rather than displaying the results instantaneously. In some cases, your application may need to be checked manually if there are details that don't tally with your credit file. Under these circumstances, you could be asked to submit further information to support your application.

What Next?

If your application has been successful, great. If not, it's a good idea to check your credit report to make sure there's no mistakes or false information dragging your score down. If there's not, think carefully before you apply for anymore credit, every application you make will leave a mark on your credit file that can bring your score down. If there is an error, talk to the credit reference agencies and the company to which the error relates to put things right.