New research by TSB has revealed that 70 percent of consumers do not know the difference between a soft and hard credit check.  This is potentially costing borrowers around £418 each in extra interest on a typical loan.

The majority (61%) of providers perform unnecessary hard credit checks when a consumer looking for a personal loan just asks for a price or rate. And hard quotes are costly – in one of two ways.  If a customer shops around for a loan and gets multiple hard credit searches, the credit footprints the customer incurs could increase their loan APR.  This is because it looks to providers like the customer has made several applications for credit.  When in fact, all they are actually doing is shopping around to get the best deal for their needs.

Or a consumer may be put off from shopping around at all, meaning they go to their main bank account provider.  These customers often end up paying a higher APR on loans with the big banks compared with market leaders.

TSB estimates that consumers are losing out by as much as £400 million each year because they are punished for shopping around. Yet the solution is simple.  Soft credit checks do not affect people’s credit rating in any way – and this is something that TSB uses to provide personalised quotes to personal loans customers without affecting their credit rating.

In TSB’s Consumers Matter report, the Bank calls on loans providers to never make a hard mark on a consumer’s credit file until they actually choose to purchase a loan – allowing customers to shop around freely to get the best deal for their needs. And not all personal loans are created equally.  It is essential that people not only borrow an amount they can afford to repay and at a competitive interest rate, but that they understand the product’s features such as whether they can take a payment holiday or if there are fees for paying off the loan in full early.

Furthermore, research by TSB reveals that there is a lot of confusion among consumers about how credit checks affect them.  The research shows:

  • 43% of consumers believe that previous occupants at their address affect their credit rating, while a further 20% are not sure.  Previous occupants do not impact their credit rating.
  • 29% of consumers believe that credit reference agencies make lending decisions, while a further 22% are not sure.  In reality, loans providers make the decision, but they use credit reference agencies to help them understand a customer’s credit history better.  This is why hard credit checks on loans quotes are bad for consumers; it looks like they’ve made multiple applications for credit.
  • 24% of consumers believe that checking their credit report impacts their credit rating, while a further 20% are not sure.  Checking a credit report does not impact their credit rating and consumers can do so very easily online.  They may want to consider checking the three main agencies: Experian, Equifax and Callcredit.

Nick Smith, Head of Loans at TSB, said  “For any market to operate well, consumers have to be able to shop around to get the best deal for their needs.  But that’s not what’s happening today, as the majority of providers penalise you for shopping around. If you take the time to shop around for a new car it normally pays off and you get a better deal.  But if you shop around for a loan to buy that car, you often end up worse off as your credit rating is hit and it could end up costing you dearly in extra interest.

“Our research shows that most people do not know the difference between a ‘hard’ and ‘soft’ credit check – so it is important we continue to demystify credit checks.”