If you happened to lend money to a friend, you'd likely expect to get it back. But what if you didn't know them all that well — you'd probably want some form of assurance that they could repay you.
That assurance is essentially what a credit enquiry is, although there's a lot more to it than that. Credit is the money you spend or will spend in the future, which you might borrow from a lender. And credit enquiries are where you or someone else requests proof of your trustworthiness so that you can make a credit application. Credit reporters then look at this application.
Who are credit reporters?
There are a lot of terms to go over, so it may pay to back up a little.
When people talk about credit, they're usually referring to money. But, unlike a dollar you might have with you now, which is spent and disappears forever, credit is the money you will have in future.
So when people look into your credit history, they're looking at how likely it is you'll be able to make money in future. They do that by looking at your past actions and how well you've paid your bills, credit cards, etc. Essentially everything you do financially is recorded in your credit history.
Who is looking at my credit history?
Credit reporters look over your credit history to get access to money in the future. Based on your financial data, they can give you a credit score, which is assessed against millions of other people who have also borrowed credit. The generated score works out how good you are at repaying the money you owe by crunching the numbers. That way, anyone you may want to do business with in the future (like a bank, lender, credit agency or even a mortgage dealer) knows how much of a risk they're taking on when they lend you cash.
So I need an enquiry if I want to land a loan then?
Exactly. But when we say everything you do is assessed, we also mean the enquiries themselves.
Why are my enquiries for credit assessed?
If someone takes out a lot of different enquiries, it means they're likely to apply for a lot of other loans. And the more loans you take on, the more risk you have of not paying those loans back.
Is there a way I can enquire without damaging my credit history?
There is. Generally, there are two types of enquiry:
These are the sort you want to make the most use of because they help you find the best price available. Before making the call, quotations let you see the best price on a credit application. While quotations are recorded on your credit history, they don't affect your score.
Complete credit applications.
This is what's also referred to as a hard pull. When a provider feels the need to check your credit history first, or if you request a check or ask for a report from a credit reporter, you're making a complete credit application. You may find out your score and other credit details in the process, but because you've gone for a complete application, it gets records as if you had taken the loan out already, which brings your score down slightly.
However, getting a credit enquiry is an expected part of life, and your score will quickly improve soon after you begin making repayments. The trouble is when you keep making them because you're not, then giving your score time to climb back up again.
Enquires sound pretty serious. Is there anything I can do to improve my score before taking one out?
Yes — you should always be doing your research into a loan first. What are the advertised interest rates, and what are the payments expected of you? When you've got this information sorted, it's time to start making a budget (we cover how to do this in another blog).
Another key takeaway is to keep track of your current credit commitments. How many credit cards, utilities or other loans are you on at the moment? From there, you can work out if you can justify the extra credit application.
Enquiries are a part of life — you can't make a credit application without them. But because they're essential to getting loans, credit cards and other types of financial approvals, they also affect your credit score.
So, if you're ever unsure, ask whether a quotation or hard enquiry needs to take place first before you agree to any credit transaction.