How does a soft credit search actually work?
There has been a lot of talk about ‘soft search’ recently and most people have come across the term, sometimes called ‘smart search’ or ‘quotation search’ when looking to gain credit or finance a purchase, but what does soft search actually mean and how does it work?
There are two main types of credit check: hard credit checks and soft credit checks. A hard credit check can subsequently be seen by other lenders whilst a soft credit check is effectively private – no matter how many you make they can’t be seen by other lenders so other lenders can’t factor this into the decision to grant you credit or not. But why should other lenders care?
What finance providers look at when granting credit
When lenders make decisions on whether to grant credit, they look at all sorts of things such as:
- Your history of making payments or missing or defaulting on agreed payment terms
- How much you have borrowed previously
- What credit limits they themselves have given you before and how you performed in paying them back
- How much credit other lending organisations have given you such as credit card issuers and how much of the credit you tend to “utilise”. For example, if you have a credit limit of £5,000 but tend to use it up to £2,500 then pay it down, your credit utilisation would have been at 50% at the point you started to pay it down – the rule of thumb is generally to use about 30% of your utilisation or risk having an impact on your score though of course this varies by lender.
- Joint commitments, for example a mortgage with your partner and if you have any missed payments
If you are on the voters roll, how long you have been at your address and how long you have had other credit facilities plus if you have a “thin file” which is industry speak for not having a great deal or no credit history.
- CCJ’s (County Court Judgements), if you are in an IVA (Individual voluntary arrangement) or are in an undischarged bankruptcy. Being in an IVA or having CCJ’s doesn’t necessarily mean you won’t get credit, but you are likely to pay a higher rate of interest on your loan whilst being an undischarged bankrupt is likely to prevent any loans to you whatsoever unless they are very small.
Finance providers look at all of the above, but crucially; they also look at your pattern of applying for credit. If you have a lot of credit requests in a short period of time, they are very likely to count against you as the consensus in the industry is that you may be desperate for credit. Of course, this is not necessarily the case; you could have just been shopping around for a mobile phone, funding a new car or even a car for a family member all around the same time.
How soft search can help
The rule of thumb is to avoid applying for credit more than three or four times a year and to ensure that these applications are well spaced out. This is where soft search comes in! If you look to do a credit check using soft search, you are the only one that can see this on your credit file so businesses cannot factor this into how they view your likelihood to pay you back – you can shop around at will!
One important point to note, often overlooked, is that if you have a soft search and then subsequently go ahead and enter into an agreement, this soft search is then amended into a hard search to reflect the fact that you now have credit and other lenders can see this. Of course, if you never go ahead with the agreement, the original soft search cannot be seen by other lenders.
So, while all of this may be slightly interesting – how does it help you get finance for a new or used car and still protect your credit rating?
Not everyone offers a soft search service. The credit reference agencies or bureaus charge companies to run a search on your file – if it’s a “hard search” this has a certain cost. The credit reference agencies reason that running a soft search is more work for them (in reality it does not cost much, if any, more to the bureau once a bureau has created the facility) so they charge businesses more for using their soft search facilities – sometimes twice as much. As a result, in order to keep costs down, some businesses (and lenders) don’t offer soft search as an option.
There is a further complication. Certain lenders, particularly Prime Lenders, don’t offer “soft search”. There’s loads of speculation why, from having antiquated systems to simple inertia to the fact that they tend to lend large amounts of money in the Prime space and want to hang onto the benefits of being able to see hard searches and more importantly other Prime lenders hard searches.
Whatever their reasons are, if you happen to apply to a broker or aggregator and they send applications to their panel (including Prime lenders) then there is a chance you might get a hard search on your file. To accommodate this, some car finance brokers, like Hippo Motor Finance, ensure that your applications first go to lenders that offer soft search. If these brokers see that one or more of these lenders do approve you on the soft search, then they will look to access the Prime lending space – with your permission – which is normally in your interests where Prime lenders tend to offer better lending terms ie lower APR’s.
So that’s how soft search can benefit you when you are in the market for a car and that’s why it’s so important to use a broker like Hippo Motor Finance that goes out of its way to protect your credit rating. Don’t forget to check if they use soft search and remember that it’s your credit rating and not theirs, so go with the ones that care for your financial health.
Use Hippo Motor Finance’ Instant Car Finance Check to do a soft credit search before applying for car finance. To discuss your car finance needs in more detail, speak to one of our account managers today on 01254 956 777.