Rebecca | Edited by Johanna
If you've used a comparison site to search for cheap insurance you may have noticed it's left a mark on your credit file. Who can see this? And can it scupper your chances of getting credit in future? Here's the lowdown...
Why do insurers look at my credit score before I’ve even bought a policy? To answer that question, we first need to explain how they get hold of your details which allow them to access your credit score.
When you ask an insurer for a quote – whether directly or through a comparison site – you'll need to enter information such as your address, job, marital status and past claims history.
The insurer then uses these details to determine the quote it'll give you – because all prices are dependent on an individual's personal circumstances. For example, a person living in a high-crime area who has claimed in the past will pay more for home or car insurance than someone in a low-risk area with no claims history.
So if the insurer has my details, why does it need to look at my credit score too? It will simply look at your credit score to make sure the infomation you've given is accurate and you haven't been telling porkies. Even though these are just 'routine checks' they still need to be logged and that is why they appear on your file. If you spot one it should be called something like 'insurance quotation' or 'ID check' with the name of the insurer that did the search.
Hold on a second, so do I need to be worried about these checks? Will they affect my chances of getting things like a mortgage or credit card in future? No, don't panic. This routine check is what's called a 'soft' search and leaves no permanent mark. This means it can't be seen by anyone other than you and the credit reference agency providing your credit score, and will disappear after 12 months. So it will have no impact whatsoever on your chances of getting credit in future.
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However, if you apply for credit – be it a credit card, loan, mortgage, some insurance etc – as opposed to just asking for a quote, the provider may check your credit file as part of its decision on whether or not it'll accept you. These checks are known as 'hard' searches, meaning they're visible to other lenders and could affect you if you apply for credit in future.
OK, so let me get this right. If I only ask for an insurance quote there's no need to worry, but if I take out a policy it will leave a mark? Not quite. While you're right about quotes not affecting your credit score, taking out an insurance policy MAY OR MAY NOT leave a mark on your file – it all depends on how you pay for it.
This is because you can either pay for a policy upfront all in one go or do so in monthly installments. While the former doesn't involve setting up a credit agreement as it's simply a one-off transaction, paying monthly is effectively a loan where you pay interest on top and therefore it's seen as you've applied for credit. And as when applying for any type of credit, you'll be credit checked.
OK so when it comes to insurance, a hard search is only carried out when I buy a policy if I've chosen to pay monthly? That's correct. However, you should be told before the insurer does a hard search (it might not use those words but is likely to say it will credit check you) and if you're not happy you're free to pay for the whole year's insurance premiums in one lump sum (this is cheaper anyway – see our Insurance Guides for more cost-cutting info).
Why do I need to worry about my credit score anyway? In the past 10 years the credit landscape has almost completely shifted towards 'rate for risk'. This means the more creditworthy you are, the better your credit score is and the better deals you can get whether they be on mortgages, contract mobile phones, bank accounts, monthly car insurance or even how you pay for your energy bill.
When you apply for credit, lenders look at your credit score to work out if you'll be able to repay what you owe. Each lender scores you differently and secretly to see if you meet its requirements as a profitable customer. People with a high score are usually seen as lower risk, and are therefore more likely to be granted credit – and possibly at better rates.
However, every time you apply for credit it adds a footprint to your file for a year. Too many, especially in a short space of time, can trigger rejections as it makes it look like you're desperate for credit. Therefore, space out applications if you can and don't do them frivolously. For full details see How to Boost Your Credit Score.