Credit Search

A credit search, also known as a credit inquiry, is a process in which a lender, financial institution, or other authorised entity requests to review an individual’s or business’s credit report. This search is performed to assess the creditworthiness of the borrower before making decisions related to lending, leasing, or extending credit. In Australia, credit searches are conducted through major credit reporting agencies such as Equifax, Experian, and illion.

Types of credit searches

Hard credit search

A hard credit search occurs when a lender or creditor reviews an individual’s credit report as part of the decision-making process for a new credit application. Hard searches are recorded on the credit report and can impact the credit score. Examples of situations where a hard credit search might be conducted include:

  • Applying for a mortgage or personal loan
  • Applying for a credit card
  • Leasing a car
  • Signing a mobile phone contract

Soft credit search

A soft credit search, on the other hand, does not affect the credit score and may not be visible to other lenders. Soft searches are typically conducted for pre-approval offers, background checks, or personal credit checks. Examples of soft credit searches include:

  • Checking your own credit report
  • Pre-approval checks by lenders for loan offers
  • Background checks by potential employers
  • Rental applications by landlords

Importance of credit searches

Risk assessment for lenders

Credit searches are an essential tool for lenders to evaluate the credit risk of potential borrowers. By reviewing the credit report, lenders can make informed decisions about whether to approve a loan or credit application and under what terms.

Impact on credit score

Hard credit searches can impact an individual’s credit score. Multiple hard inquiries within a short period may indicate a higher risk to lenders and can lower the credit score. It is advisable to limit the number of hard credit searches to maintain a healthy credit score.

Transparency for borrowers

Credit searches provide transparency for borrowers about who is accessing their credit information. Reviewing your credit report regularly helps ensure that all credit searches are authorised and accurate.

Managing credit searches

Limiting hard inquiries

To maintain a healthy credit score, it is essential to limit the number of hard credit searches. Apply for credit only when necessary and avoid multiple applications within a short period.

Monitoring your credit report

Regularly reviewing your credit report can help you keep track of all credit searches conducted. If you identify any unauthorised or inaccurate inquiries, you can dispute them with the credit reporting agency.

Understanding pre-approval offers

Pre-approval offers often involve soft credit searches, which do not impact your credit score. Understanding the difference between pre-approval offers and actual credit applications can help you manage your credit searches effectively.

Communicating with potential lenders

If you are shopping around for the best loan or credit card rates, communicate with potential lenders to understand their credit search policies. Some lenders may offer rate quotes without conducting a hard credit search initially.

Example

Consider an individual in Launceston who is applying for a car loan. The lender conducts a hard credit search to review the applicant’s credit report and assess their creditworthiness. The credit report shows a history of timely payments, low credit utilisation, and a strong credit score. Based on this positive information, the lender approves the car loan with favourable terms and interest rates.

Conclusion

Credit searches are a vital part of the credit assessment process for lenders and other financial institutions. Understanding the difference between hard and soft credit searches, managing the number of hard inquiries, and regularly monitoring your credit report can help maintain a healthy credit score and improve your chances of obtaining favourable credit terms. For more information on credit searches and credit management, you can visit the Australian Securities and Investments Commission (ASIC) website.

DISCLAIMER: The information provided on this page is for general informational and educational purposes only and is never intended as financial advice. While we strive to ensure that the content is accurate and up-to-date, it may not reflect the most current legal or financial developments. Always consult with a qualified financial advisor or professional before making any financial decisions. Use the information at your own risk.

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