Credit Score: How multiple loan inquiries impact your score and how to protect it

Credit score is a three digit score which is given to you by credit bureaus which acts as a reflection of your credit profile and your creditworthiness to your creditors. Multiple loan inquiries to different creditors can negatively affect credit score. As a result, when you need the credit, you may not be able to get the best deal. Let us understand how multiple loan enquiries affect your credit score and discuss the ways through which you can minimise the impact:

Types of inquiries: Hard vs. Soft

Whenever you apply for a loan or a credit card, the lender runs a credit check on you to determine your eligibility. These credit checks, known as inquiries, are categorised into two types:

Hard inquiries:A hard inquiry is considered every time your lender pulls your credit report during the loan application process. Every hard inquiry placed on your credit report is reflected and it brings a temporary penalty to your credit score.

Soft inquiries:Such times are when you ran a check on your own credit score or when you received a notification from a credit lender who had pre-approved your offer. Soft inquiries have no impact on your credit score.

How multiple loan inquiries impact your credit score

Decline in credit score:A hard inquiry that is conducted when applying for a loan reduces the credit score slightly if you make numerous inquiries. A few inquiries will not really harm your score, but many inquiries within a limited timeframe will cause more harm than good. However, this will only temporarily affect your credit score.

Credit hunger:When you make multiple inquiries it seems to the lenders that you are in need of credit and this may be a sign that you might not be capable of repaying your current credit.

Impact on approval chances:If your credit score gets low due to frequent inquiries, lenders will consider you a high risk. As a result, you may not be able to get a loan of your desired amount or an increased interest rate or a complete rejection of your application.

Duration of impact:A hard inquiry generally lasts for up to 24 months on the credit report. However, its effect reduces after sometime if you have a clean credit record by timely payments of your existing credit.

How you can minimise the impact of credit inquiries

Plan your loan applications: Do not apply for several loans at the same time. Avoid applying for credit facilities within a short time because this will lead to a group of hard inquiries leading to a drop in your credit score.

Check for pre-approved loans: Many lenders offer pre-approved loans that they let you know of if you are eligible without affecting your CIBIL score. This is counted as a soft inquiry which does not affect your credit score.

Use a good credit score: A credit score of 750 or more is considered healthy because it helps you get the best offers on loans from your lenders and minimises the need for hard inquiries.

Consider loan aggregators: Loan aggregators work to compare various lenders for you based on your credit score and provide you with available offers for which you might be eligible.

Keep track of your credit report: Checking your credit report helps you to keep track of your credit and check if there is any discrepancy in the report. If you find any, then you must immediately contact the credit bureau and get it fixed urgently to avoid getting your credit score lower.

In conclusion, you must be aware and take mindful measures to keep your credit score healthy at all times as this will help you get the best offers on your loan and get you lowest interest rates. However, before you even consider applying for a loan or a credit card, you must first evaluate whether you really require it or not. With this you will be able to make wise decisions and not get into a financial liability for which you were not ready.

(Note: Raising a personal loan has its own risks)