Each time you apply for credit, the lender will access your credit file to ascertain your creditworthiness.
Your credit file contains your credit history, which includes:
This means that it includes valuable information about you as a borrower and your financial ‘shopping patterns.’
Each time you apply for credit, you leave a credit enquiry on your report. This is the case even if your loan application is unsuccessful.
Each consumer credit enquiry stays on your file for five years and includes the following information:
Note that the enquiry does not say if the loan application was successful.
Applying for any sort of credit creates an enquiry on your credit file. This includes:
Financial actions that do not involve credit do not create entries on your credit file. Therefore activities like opening a new bank account, setting up a new debit card, or buying a phone on a prepaid contract would not create an enquiry.
When lenders see many enquiries on your credit report – particularly over a short period of time – they become wary. Too many entries suggest that other lenders have reasons for rejecting your application. It may also suggest you are experiencing financial difficulties.
Furthermore, each credit enquiry deducts points from your credit score. This number predicts the risk a credit provider would take in lending to you. The lower your score, the more risk you pose creditors.
Too many enquiries on your credit file will, therefore, negatively impact your credit score. This could prevent you from getting approved for a home loan.
There is no set number to what constitutes ‘too many’ enquiries. Rather, creditors will look at shopping patterns – the type of loan and credit provider a borrower has applied to over a particular period.
For example, someone who takes out payday loans has a high-risk shopping pattern and this will be reflected in their credit score.
Likewise, someone with several credit card applications in a number of months has a riskier shopping pattern than someone with the same number of applications over a period of years.
It’s a good idea to get your finances in order and, if possible, limit new enquiries in the six months prior to making a home loan application.
Avoiding enquiries completely will not necessarily help you get your home loan approved. This is because a credit history is important in demonstrating your reliability in paying back loans.
If you have no enquiries, you may only be able to open credit cards with small limits. You may have to build up your credit history before you can apply for a home loan product.
If your credit history is less than ideal, you may still be approved for a home loan through a specialist lender. In this scenario you would pay a higher interest rate, but you could later refinance to a mainstream lender when your credit file was clear again.
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