Know What Lenders Look at in Your Credit / CIBIL Report Before you Apply for a Loan
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Are you applying for loans ?
Here is what you have to keep in mind when you give lenders
permission to access your Credit Report
Your Credit Report can often be difficult to read, and understanding the terms credit bureaus (like CIBIL/ Equifax) use at arriving at your score can be even more challenging.
Did you know that if you make multiple loan applications to buy a house, it can adversely affect your credit score – whether you are granted the loan or not? To know why this happens, you need to be aware of what Enquiries are. Usually your Enquiries are part of the section at the bottom of a Credit Report (CR). This article explains the difference between the various types of enquiries in order to minimize any damage to your credit score arising from these enquiries.
What is a hard enquiry?
A hard enquiry occurs when a potential lender (a bank or other formal financial institution) accesses your Credit Report in order to determine your credit-worthiness as part of their lending decision making process. For instance, if you want to buy an apartment and decide to apply for a housing loan, the bank can access your Credit Report through a hard enquiry. Asking for an increase in your credit card limit could result in a hard enquiry. This allows a lender to get detailed information about your credit history. A hard enquiry is detrimental to your credit health because it implies that you are in need of credit.
What is a soft enquiry?
A soft enquiry typically occurs when an individual or company checks your Credit Report as a kind of informal background check on your financial health. This typically will include your own check on your Credit Report, or when a bank wants to know whether you qualify for a pre-approved loan offer.
These soft enquiries made by banks do not require your permission and, more importantly, have absolutely no impact on your credit score.
How does a hard enquiry impact my credit score?
It is good to know that a single hard enquiry on your CR will only marginally lower your credit score. Other factors like your payment history and credit utilization are given more weightage when calculating your credit score.
The problem arises, however, when you have multiple hard enquiries on your Credit report. This can happen when you make multiple loan applications in a relatively short period of time, automatically leading to an increased number of hard enquiries on your Credit Report. For example, you might decide to apply to several banks for a housing loan, hoping to increase your chances by applying to multiple lenders simultaneously. However, each of the banks will make a hard enquiry, leading to a significant lowering in your score. Similarly, you might be looking to buy a house and a car and might apply for both housing and auto loans in quick succession (say, within 3 months). Each of the loan applications will result in a separate hard enquiry and have a consequent adverse impact on your score. Potential lenders will be wary about lending you money when they see repeated credit applications on your CR.
WHY SHOULD I LIMIT HARD ENQUIRIES?
The reason hard enquiries need to be minimised is because when potential lenders see several such hard enquiries on a credit report, they tend to assume that the consumer finds it difficult to get credit and he/she is applying to multiple sources for money out of desperation.
If you already have several hard enquiries on your CR, each additional enquiry will have a greater detrimental impact on your credit score.
HOW DOES A SOFT ENQUIRY IMPACT MY SCORE? SHOULD I MINIMISE THEM?
There is no reason to be worried about soft enquiries since they have absolutely no impact on your credit score. For example, you can check your credit score as many times as you like without it having any impact on your score.
HOW DO I MINIMISE THE NUMBER OF HARD ENQUIRIES ON MY CR?
- Avoid making multiple loan applications to different banks/ financial institutions for a single purpose (i.e. for a single housing purchase).
- Avoid making multiple loan applications within a short period of time, even if they are for different purposes (i.e. – applying for a housing loan and auto loan).
- Once you know your credit score, it might be advisable to only apply for loans/credit cards where you think you have the greatest chance of approval. This eliminates the need for a large number of applications and the resultant number of hard enquiries.
It is impossible to avoid hard enquiries entirely if you are in the market for credit. In the future, (like is already the case in mature economies like the US), potential employers or landlords could also access your Credit Report. It is important, therefore, to be educated on how to manage hard enquiries so that your credit score does not suffer.
|Hard Enquiry||Soft Enquiry|
|WHEN||While applying for a loan (personal, card, auto, business, etc.)||When checking your own credit score or when banks check to determine whether you qualify for pre-approved offers|
|IMPACT ON SCORE||Negative impact increases with the number of enquiries||No impact at all on score|
|PERMISSION||Permission of the applicant is required||No permission required|
|INFORMATION CONTAINED IN THE CREDIT REPORT||Extensive, as banks need detailed knowledge of your credit history||Limited|
|TIME FRAME OF IMPACT||Part of report for at least 2 years||Has no impact|
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