A good credit score is one of the most important parameters when applying for a loan. A lot depends on it including the credit amount limit, flexibility of loan terms and most importantly its approval.
While credit score primarily rests upon the credit & repayment history, debt-to-income ratio and credit usage, the role of credit inquiry cannot be underrated. It might have a limited influence but if ignored can lead to a notable drop in the score.
This article explains the role that credit inquiry plays in your credit score and measures to manage it.
What is a Credit Inquiry?
A credit inquiry refers to the request made by lenders, banks or other financial institutions to access your credit report from the bureau. An inquiry done by you is also counted as a credit inquiry.
There are four credit bureaus in India that are mandated by the Reserve Bank of India and are responsible for tracking and sharing the credit report.
The inquiries can be classified into two types – soft and hard credit inquiries.
What is a Hard Inquiry?
A hard inquiry is when financial institutions request a credit report to assess and arrive at a decision on disbursing the loan.
Hard credit checks usually last on the credit report for around 2 years but the bureaus review inquiries only of the last twelve months. This inquiry also requires the applicant’s authorization.
While a couple of hard inquiries are less likely to majorly affect your scores, multiple inquiries in a short span of time can lead to a greater impact. This is because, for lenders, numerous inquiries can signify the inadequacy of cash or heavy debt.
When are Hard Inquiries Conducted?
They are usually done in the case of following instances:
- Credit card application (business/personal)
- Loan application (personal, car, home, education, etc.)
- Application for increase in credit limit
- Application for balance transfer card or loan
- Application for a new credit card within 2 years
Hard inquiry may marginally take down your score but may not be as impactful in the case of a stand-alone loan or card application. However, multiple credit card applications or frequent inquiries can imply that you intend to gain or are in need of cash debt.
What is a Soft Inquiry?
A soft inquiry is much less impactful when compared to its counterpart and has no effect on your credit score. They are usually checked by lenders to ascertain your eligibility for their products and do not require your authorisation.
Additionally, they are only visible to the borrower in their credit report.
When do Soft Inquiries Occur?
They are usually done in the case of following instances:
- When you are pre-qualified for credit cards
- When you are pre-qualified for insurance offers
- When your employee wants to verify your background
- When you check your credit score
Soft inquiries particularly assist credit companies in promoting and selling their products.
An inquiry from a lender can reduce your credit score up to 5 points, which is of little consequence. But, too many inquiries can significantly reduce the points and impact the score.
How can you Manage Hard Credit Enquiries?
Hard credit inquiries are a crucial aspect of the credit business and an essential component of the approval process. However, if you want to minimise their effect on your score, here are some practices that you should follow.
Review your credit report at regular intervals to check for erroneous report requests or credit checks conducted without your consent. You can further clarify them with the bureau or raise a dispute and get them removed.
Since hard enquiries last for up to 2 years on the report, plan your loan/credit card applications with appropriate gaps.
Parallely, also remember to initiate payments on time which will contribute to the improvement of your Credit Score.
Raising a Dispute with CIBIL
An unauthorised hard enquiry can either be an error or a potential fraud. In such a case you must raise a dispute to remove the loan enquiry from your credit report and maintain a good score.
It can be done online on the website of the CIBIL credit bureau by filling out and submitting a form with the necessary details.
The bureau then checks with the concerned financial institution to resolve the issue, post which you are informed about the rectification.
Here’s a detailed article explaining the process to raise a dispute with the bureau for corrections
How to check your Credit Score on Paytm for free?
Paytm allows you to find out your Credit Score with the help of a simple process. Here are the steps to follow:
- Log in on your Paytm mobile app.
- Go to the Loans and Credit Cards section
- Select Free Credit Score
- Check your credit score
Here’s another way to instantly find your credit score: Check My Credit Score
Conclusion
Credit inquiry plays a small yet consequential role in controlling your credit score as well as financial health. And with the aforementioned factors it is fairly simple to manage your credit inquiry and limit their influence on your score.
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