A finance check can be a tool used to assess your credit worthiness and for securing loans, mortgages, and even employment opportunities. However, finance checks, especially those made during applications for credit or financial products, can sometimes impact your credit score. Here’s how you can protect your credit score while navigating these finance checks effectively.

Understanding Finance Checks and Their Impact.

Before diving into protection strategies, it’s crucial to understand the two primary types of finance checks: hard and soft inquiries.

Hard Inquiries.

A hard inquiry occurs when a financial institution checks your credit report as part of a loan or credit card application process. This type of check is recorded on your credit report and can temporarily lower your credit score by a few points. Multiple hard inquiries within a brief period may signal financial stress and could have a more significant impact.

Soft Inquiries

Soft inquiries, on the other hand, happen when you or another entity reviews your credit report but not for lending purposes. Examples of soft inquiries include pre-approval checks or employment background verifications. These checks do not affect your credit score.

Steps to Protect Your Credit Score:

When looking to get a new line of credit, credit checks can be unavoidable but there are practical steps you can take to minimise the impact of finance checks on your credit score.

1. Limit Unnecessary Hard Inquiries.

One of the most effective ways to protect your credit score is to avoid frequent applications for credit. Each hard inquiry can reduce your score slightly, so apply only for financial products that you genuinely need and are likely to qualify for.

2. Monitor Your Credit Report Regularly.

Regularly checking your credit report allows you to spot inaccuracies or unauthorised hard inquiries. You can request a free annual credit report from a major reporting agency, such as Experian or TransUnion, to ensure everything is in order. If you spot something which is not accurate you should dispute errors promptly to safeguard your credit score.

3. Shop Smart for Loans.

When shopping for loans, especially mortgages or car financing, ask lenders if they perform “rate shopping” or use a specified credit broker. This approach combines multiple hard inquiries into one when they’re made within a short window, typically 14-45 days, thus reducing the impact on your credit score. By using a finance or credit broker you can compare multiple finance products from trusted lenders all whilst protecting your credit score. 

4. Use Pre-Approval Options.

Many credit lenders now offer a pre-approval processes involving soft credit checks. Getting pre-approved allows you to assess your likelihood of qualifying for a loan or credit card without undergoing a hard inquiry.

5. Space Out Your Applications

If you need to apply for multiple financial products, space out your applications over time. This strategy helps prevent a cluster of hard inquiries, which could otherwise lead to a significant dip in your credit score.

6. Maintain Good Credit Habits

A consistent history of on-time payments, low credit utilisation, and responsible borrowing can mitigate the effects of hard inquiries. A solid credit history demonstrates financial stability, offsetting the temporary impact caused by new applications.

7. Freeze Your Credit If Necessary

If you suspect unauthorised activity or an excessive finance check, you can temporarily freeze your credit. This prevents lenders from accessing your credit report unless you unfreeze it. Be cautious, as this action may inconvenience legitimate applications and may only be possible with specific credit agencies.

What to Do If Your Credit Score Drops:

Even with precautions, your credit score may experience occasional dips. Here’s how to recover:

Review and Dispute Errors.

If the dip is due to inaccurate reporting, contact the credit reporting agency who provided your credit report immediately to dispute the error.

Build Your Score Gradually.

Credit searches are just one factor that goes into creating your credit score, so focus on improving factors like payment history and credit utilisation. Consistency over time will demonstrate reliability to lenders.

Seek Professional Advice.

If your credit score has been significantly impacted, consider consulting a financial advisor or credit repair service for personalised guidance. You can get free credit score advice from UK charities such as StepChange. Don’t fall into the trap of paying any of these companies who can promise an instant credit score boost and instead use the free advice provided your credit reference agency.