Credit Searches

The use of credit searches made by lenders has recently been assessed by the Treasury Select Committee. The British Bankers Association Finance and Leasing Association has been providing evidence to the committee regarding the use of credit searches and the effect they have on people’s credit reports. Areas investigated during the inquiry are as follows:

• Do lenders really need to refer to the number of previous searches when assessing a customer’s credit application?
• How many searches would it take to adversely affect a customer’s credit record and does this restrict a customer’s ability to shop around for the best deal?
• Do customers know that searches will be carried out and listed on their credit record?
• Why don’t all lenders use quotation searches?

Do lenders consider it is important to assess numbers of credit searches on credit files?

Yes they do. Where an individual that doesn’t already have an account with a lender, a higher weighting is given to the importance on the number of previous credit searches carried out on a customer. Where an individual already has an account with a lender (e.g. bank account), the lenders will give a lesser weighting towards the number of credit searches carried out and will focus more heavily on the way they have managed their existing relationship with the lender.

The reason that new lenders focus on credit search data is that it consistently demonstrates a strong risk indicator of both consumer over-indebtedness and fraud. The greater the number of credit searches carried out on a persons credit report, the higher the risk of fraud and the higher the risk that the customer will be unable to repay the credit they have taken out.

If lenders were no longer able to refer to search data, it would severely undermine the quality of credit decisions. It would also result in a rise in problem debts from customers with multiple searches. It is in no-one’s interest to provide credit where it cannot be repaid, particularly as the government are now actively pressuring lenders to deliver responsible lending decisions.

How many searches would it take to adversely affect a customer’s credit report?

Between five and eight searches is the point at which most lenders would consider a persons credit report to be adversely affected. Sub-prime lenders may work to a higher number of searches as these customers are likely to have to shop around more. These figures were correct during 2009.

In the past, two or three searches within a short period of time could have adversely affected a customer’s credit score. However, lenders have now adjusted their credit scoring models to allow for a greater number of credit searches before they consider a customers credit report to be adversely affected on lenders credit scoring models. The reason for this is to recognise that customers have become more active in shopping around to find the best credit deals in recent times.

Do customers know that a search will be carried out and listed on their credit record?

Lenders comply with the legislative requirements for the ‘fair processing’ of a customer’s information under the Data Protection Act 1998.

This means that if a credit search is going to be carried out, the customer will always be told that that it will take place as part the credit application process. Applicants are also notified that a record of the credit search will be placed on their credit file and that a large number of applications within a short period could affect the customer’s ability to obtain credit.

Why don’t all lenders use quotation searches?

Quotation searches are a type of credit search that enable individuals to establish whether or not they are likely to be accepted for credit without going through the credit application process. Quotation searches are what is known as a ‘soft search’ and aren’t actually shown on a person’s credit report as a credit application. If the individual is happy with the quotation search, they can then make the credit application, which will leave a ‘footprint’ on the person’s credit file (this is known as a ‘hard search’).

Lenders say that the real issue is how customers can find out the likely cost of credit. Quotation searches are only one of a number of approaches adopted by lenders when liaising with customers on the price of credit. In some cases, lenders may sit down with the customer to discuss their individual circumstances before confirming the price. Therefore quotation searches should not be seen as the only route, especially where extensive consumer demand or consumer detriment have not been proved.

The opinion of us here at The Credit Agency is that quotation searches (soft searches) should be used across the industry by all lenders. This will enable people to shop around for credit more freely, without the worry of adversely affecting their credit report..

Our understanding is that the reason many lenders aren’t currently offering a quotation search is down to cost. The average cost of any credit search is £1.40 to a lender. If the lender had to carry out a quotation search and a credit application search, they would double the cost of the credit application process.

Lenders such as Barclaycard and Nationwide are already using quotation searches so that people can decide whether they want to progress with full credit applications. We hope to see other lenders follow their lead in the future.

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