Shopping Around Can Damage Your Credit!

By Jane Mack | 24 June 2005

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Next week, a new committee of MPs will start looking at the details of the proposed Consumer Credit Bill - the one that had to be abandoned because Parliament was dissolved for the General Election, and which is now being reintroduced.

As a result, they have the opportunity to make additional changes, and Nationwide BS has come up with a few suggestions which should received due consideration. For example, the Nationwide thinks that the Bill should outlaw unfair ordering of repayments on credit cards. This allows card providers to apply repayments to the cheapest debt first, leaving higher-interest items, such as purchases and cash advances, at the back of the queue to continue accruing interest. People who transfer debts to a 0% credit card and then make subsequent purchases, often don't realise that this is what happens.

Though the suggestion I like most is ensuring that consumers know what interest rate they're going to be offered before lenders run credit checks. The fact is that every time you apply for a loan or a credit card, a prospective lender can check your credit records to find out your payment history, how much money you owe elsewhere, and how much credit is already available to you. Only then will it decide whether to grant you credit, and at what interest rate. And each time they run a check, it's logged on your file - where every other prospective lender can see it.

For instance, suppose you want a personal loan offering a 'typical' interest rate of 5.7% APR, so you apply for it. The lender runs a credit check and, as a result, decides to offer you a loan at 9.9% APR instead, so you choose not to proceed. You then apply to another company offering a low-rate loan. It also runs a credit check, and sees that you have recently been credit checked but doesn't know why you didn't proceed. For all it knows, you could have been turned down.

Essentially, if you try to shop around for the best rates, lenders can trample over your credit files, making them look worse and worse each time, when there may be no good reason for this. One possible solution suggested by Nationwide BS would be for initial application forms to ask more detailed questions, so that you can get an approval in principle - and be told the rate that you'll be offered - before credit checks are carried out. You'd soon be caught out if you'd lied on the application form, so a lender could always change its mind afterwards.

In my view, you should be allowed to shop around for the best rates without this potentially counting against you. After all, surely you have a right to know where you stand before you allow lenders to go leaving dirty great footprints all over your nice clean credit files!

More: Find great deals on personal loans and credit cards | How To Improve Your Credit Rating.