Most of the long term lenders we feature will run a credit check on your account prior to approving your loan. By running a standard credit check through a credit reference bureau like Experian, Equifax or CallCredit, the lender is given an insight into your previous repayment performance for other lines of credit such as credit cards, personal loans and car loans. If you have failed to keep up with repayments in the past, you will likely have a low credit score compared to someone who regularly repays on time who will have a high credit score.
Some of the lenders we featured that offer secured loans will be less likely to run a credit check on your account. Usually, the lender runs credit checks to get a better idea of how well you have paid your other loans but if the loan is secured on something like your car or house, this is sufficient security for the lender. Below we explain in greater detail how the credit checks involved impact your credit file and your credit score.
Once the lender runs a credit check on you, it leaves something known as a ‘footprint’ on your credit file. There is no cost incurred, it is simply a visible mark that confirms that you applied with a lender and will be removed after 12 months. The idea is that other lenders who run a credit check on you will be able to see all the footprints over the last year. So if you have made a lot of applications, the lender will be able to see based on the number of footprints. Making several applications with lots of different lenders may affect your chances of being approved for a loan. Lots of searches on your account suggest you may be desperate for funds or have been declined numerous times elsewhere.
If you fail to meet any repayment, the information from the lender will be fed back to the credit reference agency. By missing a repayment, it will be recorded negatively on your credit file and this may lower your credit score. Since other lenders may run a credit check on your account in the future, they will be able to see that you have failed to repay a loan and this may make it harder to obtain finance in the future.
By not repaying an unsecured loan will also negatively affect your credit rating. Although you are at risk of losing your collateral such as your car or house, the information is sent back to the credit reference agencies and reflected on your credit score to ensure that you do not have easy access to other forms of high-cost borrowing. If you seriously fall behind on payment, this could eventually lead to a CCJ (County Court Judgement), which will dramatically impact your credit score.
By comparison, repaying your loan on time may improve your credit score. Keeping within the loan agreement will reflect positively when the information is fed back to your credit file. This will make you a better borrowing prospect and may make it easier to access finance in the future. However, it is important to note that high-cost borrowing should not be used specifically for building your credit rating.