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Understanding credit checks

What is a credit check?

A credit check is something that’s conducted to establish a person or business’s credit rating. When applying for a loan or other forms of credit, each person or business is given a credit score. A credit check is carried out to find out someone’s score.

 

Understanding credit checks

What is a credit check?

A credit check is something that’s conducted to establish a person or business’s credit rating. When applying for a loan or other forms of credit, each person or business is given a credit score. A credit check is carried out to find out someone’s score.

When do you need a credit check?

As a business or individual, you’ll need a credit check whenever you’re applying for a loan or credit.

For individuals, this could be when setting up utilities bills, getting a mobile phone contract, applying for a mortgage or bank loan, or renting a property.

For a business, a credit check will be needed if you are applying for financial support – through, for example, a bank loan, mortgage, corporate credit card or tenancy. You will also need a credit check if applying for trade credit from suppliers. As supply chains are so interlinked, a credit check is vital to protect the financial health of your supplier, but also the wider supply chain.

Why is a credit check important?

A credit score provides a framework for lenders to decide whether to do business with potential borrowers and, if so, under what terms. If credit scores didn’t exist, it would be very hard for lenders to know whether they should provide credit. It would also make it far more difficult for borrowers to receive a loan.

A credit report assesses the payment behaviour, legal history and financial health of the applicant. With this information, lenders can assess how much risk they’ll take on if lending to the borrower. This will influence their decision to lend, and the repayment terms under which a loan is made.

If a business or individual’s credit check reveals they have a high credit score, this means there is less risk in lending to them as they are more likely to meet their financial obligations. A low credit score, however, indicates greater risk. Usually, the lower the credit score, the higher the interest on the loan.

How is a credit check made?

A business (or commercial) credit check is made via a credit reference agency, such as Graydon. Companies like Graydon have a range of internal criteria to determine the creditworthiness of a business. In fact, Graydon’s credit check uses more than 2,000 characteristics to assess a company's credit score.

This includes evaluating data ranging from payment history to working capital, structures of concern (such as deepening financial dependence on other companies), sector risks and opportunities, personal insight into payment culture, unusual patterns of behaviour as well as a five-year financial review. 

Graydon also conducts individual credit checks, providing:

  • consumer credit information, comprising accurate and quality consumer data;
  • applicant information, such as names and home address;
  • payment history, including all credit commitments such as bank accounts, loans, credit cards and mortgages;
  • all records of County Court Judgements; and
  • credit risk scores via the Gauge score, which provides a reliable assessment of an applicant's associated credit risk.

Can I check my own credit rating?

Yes, whether you’re an individual or business, you can check your own credit rating. It’s often useful to do this in advance of applying for credit. This way, if you spot any issues or errors, you have time to rectify them or dispute mistakes before you make your credit application.

What if my credit rating is lower than I expected?

A credit check can often throw up some unexpected results. If you’re unhappy with yours, there are measures you can take.

Your credit rating is based on information that extends as far back as six years, even if you’ve since closed bank accounts you held in that time. However, it’s the last 12 months that are the most important. So the better your current payment behaviour, the more likely your score is to improve.

Setting up direct debits to pay bills and ensuring you repay any credit on time is key to improving your credit rating. If you miss payments or take out too much credit, this can count against you. But if you borrow money and pay it back on time, your credit rating should improve.

If you suspect something is wrong with your report, it’s important to get this fixed so it doesn’t affect future credit checks. You should take this up with the company that’s recorded the information and, once they’ve replied, ensure the relevant credit agency has changed it on your file. In the meantime, you can ask the credit agency to make a note on your file that the information is being investigated.

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