Your credit score, as we all know, plays a major role in the approval of your loan. This applies to every form of credit. Whether you're applying for a personal loan, car loan, home loan, credit card, or any other form of credit, unless you have a good credit score, getting approved can be a tough call!
Given the importance of the credit score, you should take some time in understanding the various factors that might affect it. Common factors include your credit utilisation ratio, the length of your credit history, your credit mix, and payment history. Other often overlooked factors include credit inquiries.
But what are credit inquiries and how do they work?
Broadly classified as hard and soft enquiries, these enquiries are usually made when you're applying for new credit. As with the mentioned factors, they too have a major impact on your credit score. But how do they affect your score? Let’s take a closer look.
Every time you apply for credit, the lender in question will pull out your credit report in a bid to assess your credit behaviour. They precisely check the report to understand how you’ve managed your finances. Since the enquiries are interlinked with your credit application, they are called hard enquiries.
While a single inquiry doesn't have any major effect on your score, multiple inquiries can end up pulling it down. This is especially relevant when inquiries are made within a short time period. Remember, every time a lender pulls your credit report from the bureau, a new credit account is opened against your name.
Having multiple inquiries in short timeframes might appear concerning to most lending institutions. That is because it indicates unhealthy borrowing and spending habits. Lenders will deem you credit hungry and eventually reject your application. The result: your credit score will suffer.
One of the easiest ways to avoid this is by applying to one lending platform at a time. While we understand that you are strapped for cash, going overboard with the applications will only leave an adverse impact on your credit score.
For better results, thoroughly research the available lenders and apply with a company whose eligibility terms sync with your credit behaviour and income.
How long will these enquiries stay on my report?
Hard enquiries usually stay for very long periods in your credit report. However, their impact reduces with time. Regardless of that, it is best to avoid the instance of these inquiries in the first place.
As opposed to hard enquiries, soft enquiries occur when an agency or an individual check your score to pre-approve you for their financial products. This can be anything from personal loans, credit cards, to insurances. A soft enquiry might also take place when you check your credit report for assessing any inaccuracies or checking your overall financial performance.
Soft enquiries have no impact on your credit score. In most cases, they aren’t even recorded on your credit report.
Aditya Kumar is the Founder & CEO of Qbera.com.
Read his columns here.
First Published: IST