How do loan inquiries affect your credit score? 5 must-know facts

In India’s ever-evolving, dynamic financial landscape, clearly understanding how loan inquiries impact your credit score is of utmost importance.

This is important because a low credit score makes it very difficult to secure future loans, credit cards, etc.

This can complicate matters during difficult times such as medical emergencies, home renovation work, etc. Hence, irrespective of whether you are applying for a credit card, personal loan, or mortgage, each individual inquiry can influence your credit profile and creditworthiness. Keeping this in mind, here are five crucial facts borrowers should know:

1. Difference between hard and soft credit inquiries

When you apply for a loan, it generally triggers a ‘hard inquiry’, in which lenders assess your overall credit profile and your credit score to determine the risk involved in lending you money. If an adverse finding is reported, for example, a recent missed payment, default on EMI, etc., then such developments can slightly lower your credit score. Such findings also stay on your report for up to two years.

On the other hand, soft inquiries, such as checking your own credit score or other pre-approved offers, do not adversely impact your credit score. That is why this distinction between hard and soft inquiries must always be kept in mind.

2. Multiple credit inquiries may indicate risk

This is another crucial point to remember. Submitting several loan applications in a very short period of time can raise serious red flags for lenders. They take this as a sign that the borrower is heavily reliant on debt to even meet day-to-day expenses and has limited savings. 

This is a clear sign of the possibility of default. Every single hard inquiry may reduce your credit score by a few points, but cumulatively, they can have a more significant and long-term impact on your borrowing ability.

3. Why timing matters in credit inquiries

Further, it is recommended that you don’t apply for several loan or credit card applications simultaneously or in a very short period because when you send too many applications and there are several inquiries on your credit profile from different sources then all such inquiries cumulatively add up and stay on your credit profile for several years to come.

In all such cases, the time frame matters a lot. Whenever your credit score and profile are checked by any future lender or credit card issuing financial institution, they always see this as a huge negative. Due to this, it becomes very difficult to get a new personal loan at favourable interest rates and premium credit cards on easier terms.

4. How good financial habits improve credit score

It is also important to keep in mind that the negative impact of hard inquiries on your credit profile is generally temporary. The negative impact can be reversed with consistent and responsible credit behaviour. On your part you are required to ensure timely repayment of your credit card bills or loan EMIs.

Further, you are also required to keep your credit utilisation ratio low. These simple ideas can help your credit score recover to a reputable level in a few months. Hence, in the end, it is only about showing sincerity with regards to your repayments of borrowed money and credit card bills.

5. Stay alert to unauthorised credit inquiries

Occasionally, you might even notice checks and inquiries on your credit report that you don’t recall or recognise at all. Do remember, all such checks and inquiries can be errors or signs of identity theft.

That is why it is important to regularly monitor your credit report and promptly raise disputes against unauthorised inquiries so that any discrepancies can be immediately resolved. These straightforward method is essential to help you in maintaining your credit health.

How credit inquiries affect your credit score

Credit inquiries can influence your credit score, especially hard inquiries made during personal loan or credit card applications. Every hard inquiry may lower your credit score by a few points. Do keep in mind that every hard inquiry lower your credit score by a few points and it sticks on your report for upto two years. Multiple hard inquiries in a very short period of time can signal credit risk to lending institutions. 

Final thoughts on credit inquiries and your score

Hence, loan inquiries, especially the ‘hard’ ones play an extremely cumbersome role in shaping your credit score. By understanding their impact, discussing with your respective credit bureau and associated professionals and managing your credit applications efficiently can all cumulatively help in safeguarding your financial reputation.

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