As part of the general practice of ethical lending, payday lenders will check your credit score and credit history. If a lender does not check your credit, unless they specify they offer payday loans no credit check , you have a right to complain if you find yourself unable to pay back the loan.
The Financial Conduct Authority (FCA) is responsible for setting the rules of the lending industry and they expect the lenders to carry out a credit check to make sure that the borrower in a position to be able to pay back the loan with all the interest and fees, as well as being able to continue paying their rent, mortgage, travel, food bills and other typical financial obligations. This is in place to avoid borrowers falling into further financial difficulty in the light of taking out a loan. It is not ideal that a borrower would have to take out a second loan just to be able to pay off the first.
Payday lenders will go about checking your credit via credit reference agencies. The three major credit reference agencies in the UK include Experian, Equifax and Call Credit. Before looking into your credit file, it is common practice that the lender will ask for permission at the application stage to do so. This is usually highlighted in the terms and conditions.
They need to be sure that you do not have any other debts or loans which are outstanding and that you do not have a history of missed or late repayments. If you do, it would be deemed irresponsible to lend to you.
What will a lender see when checking your credit file?
By accessing your credit file, a lender will receive your credit score which can range from 0 (very poor) to 999 (the best possible score). Whatever your score is, it will act as an indicator as to how responsible you are with your money. They may accept or reject you on the basis of the number displayed to them.
When checking your file, they will receive the following information about you:
- Your full name
- Your date of birth
- Electoral roll information in order to confirm your current and previous addresses
- Any loans, mortgage and credit card account which are open, their start date and the amount you can borrow from each. Accounts which have been closed in the last six years will be listed as well. After this period, these closed accounts will disappear.
- Current account overdraft
- Any previous application searches and search footprints
- Open joint accounts with other people (e.g a spouse)
- Missed repayments and the amount of times this has occurred
- Your history of debt, including information on bankruptcy and CCJs.
- If your identity has ever been stolen or if you have ever been a victim of fraud
What other checks do they do?
For payday loans, they will need to make sure you say you are who you are. They will make sure you live at the address you have given and that you work at the place you say you do. Therefore, an identity check is standard, but you probably won’t even be aware of its going on as they not likely to contact you unless they flag you. A lot of this information they will be able to gage from your credit files, such as name and address.
A responsible lender will carry out affordability checks. This is so that you do not fall into more debt and end up in a spiral of taking out loans to pay back the one before. This affordability check will include looking into whether you have a regular income, what your general monthly outgoings are and what your larger financial obligations are. If a lender thinks that you are capable of paying back the loan as well as the interest, then they will approve you for the loan. If they do not, it would be irresponsible lending for them to approve your loan application.
Affordability checks play an important role in determining the rate you will receive.
