Does applying for credit hurt my credit?

By Emma Lunn

Whenever you make an application for a credit card, or any other form of credit, it leaves a mark on your credit reports. Too many such marks -- called "inquiries" or "searches" -- can damage your credit rating.

However, not all inquiries are the same -- and not all are harmful.

Hard searches
Hard searchers and inquiries do leave a negative impact on your credit report. They occur when a lender pulls your credit reports in response to your application for credit.

"When lenders look at your report, they can only see previous searches that resulted from you applying for credit. These are called credit application searches," says James Jones of credit rating agency Experian.

These searches can help lenders make their decisions about your riskiness as a borrower. credit-application

"Certain patterns, alongside other information, can indicate an applicant is high risk," Jones says. "For example, a lot of credit applications in a short space of time might be a sign of financial desperation or fraud." 

The issue for consumers is that they often don't know what rate they will be offered on a credit card or loan until a search has been carried out -- and, hence, might make a lot of applications. It's a catch-22 situation: In their efforts to get the best rate available, borrowers inadvertently damage their credit rating and so get offered higher interest rates.

"However, credit searches are just one type of data lenders use when making lending decisions -- they look at plenty of other information too," adds Jones.

Soft searches
Not all credit card companies and card comparison sites run hard searches; some have introduced a "soft search" to give customers an indication if they're likely to get accepted for a product.

Nationwide and Barclaycard both run soft searches, which won't be visible to other lenders looking at your credit report.

A ‘soft' search, also known as a "quotation" or "inquiry" search, is designed to allow a consumer to compare different credit deals before submitting a full application, explains Neil Munroe of Equifax.

"These search footprints should have no impact on credit scores as they are shown as a different type of search to an application search and are, therefore, treated differently," Munroe says.

There are also certain other credit checks that won't affect your credit score. For example, you can check your own report as often as you wish, and this won't harm your credit rating.

Landlords will often check the credit report of potential tenants before letting a property to them, but this will also not damage your credit because you are not applying for credit. Also, landlords won't be able to see information about searches on your report. The limited information they see will consist only of public information registered against the tenant, such as county court judgments (CCJs), bankruptcies, individual voluntary arrangements and administration orders.

Likewise, if you receive a letter telling you you've been "pre-approved" for a credit card or loan, don't worry - a credit check won't have been carried out. Under the Data Protection Act, companies need an applicant's permission to perform a credit check that goes beyond publicly available information.

"Some credit card companies may undertake pre-screening, which would remove customers already in debt or who have CCJs," Munroe says. "No search is registered when this takes place."

How to shop around
If you're shopping around for a credit card, loan or other form of credit, it's important you know what kind of search will be carried out.

Equifax advises consumers to ask the lender what type of search they will be performing.

"It may also be advisable to check your credit report after the application to check the right type of search has been undertaken," Munroe says.

If you're looking for your first mortgage deal, you might want to apply for a "decision in principle" or "agreement in principle" to see if, a particular lender will lend to you. However, this counts as a search, so it's important not to do this until you've found the mortgage deal you definitely want to apply for.

"A decision in principle on a mortgage is not a price quotation -- you are asking for a commitment to give you credit, so this will register a credit-application search," Jones says.

See related: How to fix mistakes in your credit report, On the job hunt? Check your credit first


Published: 18 June 2013