Why don't more lenders offer quotation searches?
A FULL credit search is an essential part of any application for a credit card or loan: it allows lenders to assess the applicant's risk and dole out borrowing appropriately.
The downside is that the full search process leaves a 'footprint' on a credit report which can be interpreted negatively by other lenders so shopping around becomes more difficult.
There is a simple way around this problem.
'Soft' or quotation credit searches allow lenders to give an idea of the interest rate and borrowing amount they'd offer the applicant footprint free.
So why don't more lenders offer them?
What is a quotation search?
As we noted above, the effect of a quotation search for the consumer is simply that it doesn't show up on a credit report as an application for credit.
From the credit reference agency's point of view the difference is in the depth of the search they carry out, a full application search may include additional checks for fraud, for example.
Offering quotation searches is regarded as best practice for lenders.
The Information Commissioner's Office (ICO) guidelines for best practice advocates giving customers all the information they require to choose the card or loan with the best possible rate.
After a 2009 Government inquiry into credit searches, the Office of Fair Trading (OFT) updated its guidance to prevent irresponsible lending.
The guidance now reads: "We [the OFT] consider that borrowers should be able to shop around for credit without a footprint being left on their credit files which could impair their credit rating. This would be facilitated by creditors undertaking 'quotation searches', as distinct from 'application searches', when appropriate to do so."
Quotation searching today
However, over two years later, that guidance has made little difference to the way that the credit market actually operates.
The only high street lender to have incorporated a 'soft search' facility into its online sign up process is Nationwide.
"We'd like quotation searches made available to all consumers, so they can shop around freely for products without any impact on their credit files," said Paul Wootton, the building society's head of personal loans when the facility was first made available.
Peer to peer lender Zopa also uses a quotation search for anyone considering a personal loan through their service.
More information on peer to peer lending is available here.
Barclaycard's credit card site have just started offering a check tool for available here before applications are submitted.
It's a nice search because it ranks Barclaycard products in order of the likelihood that an application will be successful rather than focusing on just one deal.
Unadvertised quotation searches
Since so few lenders actually offer quotation searches upfront is it worth asking for a quotation search when the lender doesn't specifically offer it?
The consensus on this seems to be: no.
Many banks and building societies have a strict rule against quotation searches. Halifax, for example, go out of their way to say that they don't offer the service.
However, there are cases - unadvertised balance transfer offers, for example - in which a lender may be able to give an idea of an application's success before carrying out a full search.
What's wrong with full searches?
All in all, currently consumers often have to go a long way to avoid a full or application credit search.
Which begs the question: why bother?
Problems with 'shopping around'
We think of ourselves as savvy borrowers when we look around to find the lenders offering the best deals.
Yet, increasingly, just looking at advertised deals has its flaws.
Just from looking, applicants only have a very general idea on whether or not their application would be accepted and only a general idea of how much and at what interest rate they'd actually be able to borrow.
For example, legislation introduced in February 2011 means that the 'representative interest rate' advertised with credit must be offered to 51% of successful applicants.
In other words, just under half of applicants could end up paying more to borrow than they thought they'd have to when they applied.
Problems with multiple searches
In addition, as we've said above, every time a full application is made for a card or loan, it leaves a record on the applicant's credit file.
Other lenders looking at this could regard multiple applications as being a sign of desperation or underlying financial insecurity and may refuse to lend on that basis.
As with all credit scoring, however, there are no hard and fast rules on the number of applications that could make a difference.
Speaking to a Treasury committee in 2009, for example, Fiona Hoyle of the Finance and Leasing Association said, "... a couple of years ago if we had two, three or four [searches] that would have been a strong indicator for us, but now that we know that people are shopping around more and making more applications, then if it's eight or more within that period of time then that's a risk."
But Hoyle's claim that lenders have become more attuned to the fact that consumers shop around isn't backed up by any specific rule or guidance from lenders.
It's all a bit of a guessing game.
Why do lenders prefer full searches?
We can speculate that lenders prefer applicants to undergo a full credit search for three main reasons.
The 'first lender wins' mentality
Big lenders spend millions of pounds on marketing so once they've got a consumer making an application they're keen to tie them in to borrowing.
Simply, if consumers can shop around, they might well shop elsewhere.
Cost of searches
In addition, each credit search carries a cost thought to be in the region of £1.40.
Just as with the marketing work we mentioned above, lenders don't want to spend money unless they can be assured of earning substantially more back as a result.
Problems with quotation searches
Finally, some lenders have claimed that there are deeper problems with the quotation search system which make full searches preferable.
Searches are recorded as a protection against lending irresponsibly and against fraud: without searches being flagged up it could be easier for consumers to borrow a lot of money very quickly either legitimately or through fraudulent means such as identity theft.
Since a full application is check is always needed before credit is extended a quotation search in and of itself isn't useful to lenders.
The future of quotation searching
For many years now consumer groups have argued that greater use of quotation searches would be really beneficial for consumers.
In July 2009, for example, Frances Walker at the Consumer Credit Counselling Service said: "Borrowers should not be punished for not being able to properly shop around; greater use of quotation searches should be in place."
Around the same time, Moneysavingexpert and Consumer Focus agreed and even wrote an open letter to the body responsible for credit sharing.
As we've seen, however, little progress has been made more recently.
Changing credit scoring
From the Treasury report into the subject one of the major problems appears to be that changing credit scoring significantly would require a huge investment on the part of banks and reference agencies.
For example, the committee heard evidence that Germany runs a ten day soft search facility - somewhere between quotation and application searches - and that in the US consumers have a credit score which gives them a much better idea of success pre application.
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