Do loan inquiries hurt your credit score? Here's what you need to know

With the rapid shift towards digital lending in India, borrowers are becoming more vigilant about maintaining a healthy credit score and safeguarding the integrity of their credit profiles. Lenders now rely heavily on creditworthiness while processing loan applications, making credit health more important than ever.

Today, most borrowers understand how multiple loan inquiries, especially hard inquiries, can impact their credit scores. To avoid rejection and secure better loan terms, it is essential to practise responsible credit behaviour and adopt smart credit 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 credit inquiries and their impact on credit score

Credit inquiries occur when a lender reviews your credit report to assess loan eligibility. These are of two main types, hard inquiries and soft inquiries.

• Hard inquiries happen when you apply for credit, such as a personal loan or credit card. Each hard inquiry may slightly lower your credit score temporarily. Multiple hard checks in a short period can signal credit dependency, affecting both loan approval chances and interest rates.
• Soft inquiries, on the other hand, occur when you check your own credit score or when lenders conduct background checks for pre-approved offers. These do not negatively impact your credit score.

How hard credit inquiries affect your credit score

A single hard inquiry can result in the reduction of your credit 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 credit 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.

Tips to reduce the negative impact of loan inquiries

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.

Will taking a loan give you a bad credit score?

It is important to keep in mind that, taking a loan won’t hurt your credit score if managed well. In fact, timely repayments can result in even boosting your credit profile. However, missed EMIs, high loan amounts, or multiple loan inquiries in a short time can negatively impact your credit score.

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.