Are loan inquiries hurting your credit score? Here’s the truth behind the numbers

As borrowing and lending is becoming digital in India, the borrowers are increasingly careful about their credit scores and the integrity of their credit profiles.

Every borrower now clearly understands and recognises the importance of the impact that multiple loan inquiries have. That is why it is always prudent to inculcate responsible credit usage and management habits.

Further, according to Sumit Sharma, Founder, Radian Finserv “Too many inquiries within a short span can temporarily lower the credit score, especially when triggered by lenders. However, in normal situations of self checks, there’s typically no negative impact.”

That is why understanding how these inquiries influence creditworthiness of individuals on a long term basis is important for helping them in sustaining strong financial health.

Understanding the implications of credit inquiries

Credit inquiries generally take place when a particular lender goes through your credit history and your credit report to evaluate and check your loan eligibility. There are basically two kind of credit inquiries:

• Hard inquiries: This kind of inquiry is initiated when you submit an application for credit such as personal loans, credit cards etc. Every single hard inquiry can result in a slight, temporary dip in your credit score. Further, multiple hard inquiries within a short duration of time may signal credit hungry or loan dependence behaviour to the lenders. This has the potential to influence loan approvals along with the applicable interest rates on them.
• Soft inquiries: Now a soft inquiry generally occurs when you check your own credit score or when lenders conduct normal background checks for pre approvals. These inquiries do not influence your credit score in a negative way.

Impact on credit score
 

A single hard inquiry can result in the reduction of your score by a few points, whereas several inquiries in a very short period of time i.e., a condensed timeframe can have a more serious impact on your credit score.

As repeated hard inquiries, set an unwanted precedent that is looked upon pretty adversely by lenders. It signifies clear chinks in the armour and weak financial health on the borrowers part. That is why you should ensure that you do not make several credit requests in a very short span of time.

Further, hard inquiries stay on your credit report for up to two years but generally impact your score only during the first year. That is why on your part it is your responsibility to ensure the least possible hard inquiries on your credit profile throughout the borrowing period.

Mitigating negative effects

To ensure that you are able to safeguard your credit score you should:

• Plan applications properly: Avoid submitting multiple credit applications simultaneously. This will ensure that the lenders do not foresee you as a credit hungry borrower.
• Seek pre-approvals: Select lenders offering pre-approved loans, which involve soft inquiries. Before applying for a loan, clearly discuss the terms and conditions with the lending institution.
• Regularly check credit reports: Regularly check, go through and review your credit report for erroneous or unauthorised inquiries. Further, if problems are found, dispute them with the credit bureau to have them rectified. For this you can reach out to the customer support team of your respective credit bureau and discuss your problem with them.
• Focus on maintaining good credit habits: Do ensure that you make timely payments and manage existing debts in a responsible manner. This will help you in improving your credit profile over time.

Conclusion

Hence, by being mindful of first planning and thinking new credit applications through, will help you in keeping a healthy credit score. This will in turn help in improving your chances of personal loan and credit card approvals in the future.

Therefore, by limiting hard inquiries and adopting responsible credit behavior you can maintain a healthy financial profile.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.