When you apply for a loan or a credit card, do you know that an enquiry goes out to the credit bureau regarding your creditworthiness? This is called a credit enquiry and they are of two kinds: a hard enquiry and a soft enquiry. Let’s take a look at what these are and why you have to be careful about it.
What are credit enquiries?
Lending institutions request a CIBIL report from the credit bureau each time you put in an application for a loan or a credit card. This is called a credit enquiry. This happens for both secured and unsecured credit.
Things to be careful about
The fact is that each time an enquiry is made on your creditworthiness, your credit score takes a hit. This is irrespective of whether you have a high or low credit score. Since it can take months to build up your credit score to have a good rating, it is not advisable to then make multiple applications for loans or credit cards within a short period of time. This is something that most people feel like doing, thinking that it may be a good idea to apply in different places for loans or credit cards, just in case they get rejected in one or two places.
What they don’t realize is that to get a loan or credit card application approved, you need a good credit history. So, they are essentially shooting themselves in the foot if they bring down their credit score by applying to many places at once. This is why, it is best to make minimal number of applications and ensure your credit score is always good to go. That way you can avoid the stress of rejected applications or unfavorable loan terms and conditions.
Types of Credit Enquiries
There are essentially two types of credit enquiries: soft and hard. Let’s take a look at these:
Soft enquiry: Also called a soft pull, this is conducted by a lender for an existing customer to check for eligibility for certain products or offers. These do not negatively impact the customer’s CIBIL score. An example of when this is done is when you have been using a bank’s credit card and they want to see if you are eligible for a credit limit enhancement or other offers. The customer is usually unaware of such enquiries and it does not hamper his score in any way.
Hard enquiry: A hard enquiry is one in which a report is requested of the credit bureau to check your creditworthiness. Just one or two enquiries will not negatively impact your score but if there have been multiple enquiries in a short period of time, it would definitely have a negative impact. Why is this so?
When a lender submits a request for a hard enquiry on your credit history from the bureau, they are able to see all the enquiries that have happened up to date. Keep in mind that each time you apply for a loan or credit card, a hard enquiry goes out. So let’s say you had been desperately applying for loans or cards in a totally haphazard manner in the preceding few months. When a lender sees this pattern, they are likely to think that you are financially undisciplined, having financial hardships, and are desperate for money, and lack the resources or discipline to pay back your dues on time. From the point of view of the lender, this makes you extremely high risk.
How does this impact you?
The higher the risk assigned to you as a customer, the higher will be the cost of borrowing. This means you may get a higher rate of interest than someone with a higher credit score. This is because, since you are considered at risk for not paying back the dues, and they are still lending you the money, in order to ensure that the money is recovered, they will charge you a higher rate of interest in order to cover their risk.
Other ways in which you may be impacted is by being offered unfavourable terms and conditions such as a lower quantum of loan or a shorter tenure than what you requested.
The solution
The only ways in which you can avoid this situation is to pick your lender carefully and apply to only one lender at a time. Make sure that your credit score is always good by paying off your credit card dues or loan EMIs on time. Applying through third-party agents or Direct Selling Agents (DSA) is also a problem because they will send out your loan or credit card application to multiple lenders, resulting in multiple hard enquiries. So, it is always better to apply directly through the bank or NBFC rather than go through a third party.
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