70% of consumers do not know the difference between a soft and hard credit check, TSB has found, and the bank claims this is potentially costing borrowers around £418 each in extra interest on a typical loan.
TSB has said that 61% of providers perform unnecessary hard credit checks when a consumer looking for a personal loan just asks for a price or rate.
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.
However, 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.
The research shows that 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. 24% of consumers believe that checking their credit report impacts their credit rating, while a further 20% are not sure.
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. TSB is committed to helping our customers borrow well, which is why we offer personalised quotes on a TSB loan without affecting credit ratings.”