Let’s say you’re lending money to a friend at work. You’ll want to get it back at some point, so you’ll consider whether that person is likely to repay you, and three factors will probably count in her favour: firstly, she’s your friend, and so presumably you trust her based on past experience, and secondly, she works with you so you can be relatively confident that her salary will enable her to repay you. Thirdly, you probably work with her every day so she’s not likely to disappear without paying you back. With those criteria in mind, you’d probably be happy to lend her five pounds for lunch.
How RateSetter credit checks work
Now let’s imagine that you’re lending money to someone you don’t know. You’d still want to find out whether that person can be relied on to pay her debts, and whether she will be able to afford those repayments. That’s essentially the position that our credit department finds itself in. They don’t know borrowers personally, but they need to work out whether it’s appropriate to lend money to them.
Most lenders use a credit reporting company to help with this. Credit reporting companies (you may have heard of a few – Experian, Equifax and Callcredit are some of the largest) compile information from banks, the electoral register, credit card companies and many other sources to build up a picture of your financial history. They share this information with people like us, for a fee, and we use it to check that you’re likely to repay the loan. We take the utmost care with your data, and you can find out what steps we take to protect it here.
What are we looking for? Alongside anti-fraud checks, we focus on two key things – firstly whether you’ve borrowed money in the past and if so, whether you paid it back on time, and secondly, whether or not you’re likely to be able to afford the repayments on our loan.
It’s an imperfect science though, and sometimes borrowers can be unfairly penalised, usually when they do something which affects their credit score without them realising it.
Hard and soft credit checks
A good example of this is the fact that a full credit check affects your credit rating, and if you apply for five loans and are turned down for each one, your credit rating might plummet without you being aware of it, making it even harder for you to borrow money.
We don’t think that’s fair – as a result, we do what’s called a ‘soft’ credit check when borrowers apply to us. That gives us an indication of whether the borrower can afford that loan, without affecting their credit score. Before you apply for a loan with any provider, it’s worthwhile to check whether the application will affect your credit score.
Credit reporting is important and the companies we named above all allow you to check your credit score for free (Money Saving Expert has a great guide to this here) – it’s worth taking a look now if you have the chance, as small errors can cause big problems in the long run.
Do you keep track of your credit score? Do you think we should be looking at other factors? Let us know in the comments section below.