Anytime someone submits a request to the credit reporting agencies to have a look at your credit report, an inquiry is generated. The information regarding the entity making the inquiry, date and reason for the inquiry are captured and recorded on your credit report. But not all inquiries are the same. The key is to understand the difference between two different types of inquiries and how they affect the CIBIL score.
Credit checks are often categorized as hard inquiries and soft inquiries. Let’s see what they mean.
Whenever you apply for a credit card, home loan, or any other kind of mortgage you give permission to the prospective lender to pull your credit score and credit report. The information in your report helps them decide whether you are worthy of giving credit or not. A high score gives them assurance that you are a worthy borrower while a low CIBIL score will usually trigger a negative response. So basically whenever you are seeking credit, the lender pulls your credit information and this is considered as a hard inquiry. Bureaus consider that each hard inquiry associated with a new loan, changes the risk factor associated with the borrower. Hence hard inquiries have a negative effect on your score. However they account for only 10% of the overall credit score and therefore bring a dip of only 5-8 points. Factors such as payment history and credit utilization have a greater weightage.
Some situations which will trigger a hard inquiry are
- Application for a home loan, student loan, auto loan, personal loan or business loan
- Application for a credit card
- Mortgage applications
- Requesting the credit card company for a raise in credit limit
- Responding to a pre-approved credit card offer received.
Some situations which generate a soft inquiry are
- Initial checks by credit card companies and other loan providers who offer you pre-approved loans.
- Background checks conducted by potential employers to ensure that the candidate is a responsible individual with good credit.
- Periodic checks by credit card issuers to analyse your lending behaviour.
Soft inquiries do show up on your credit report but they are not factored in the credit scoring models. So if you have a low CIBIL score, you need not worry about soft inquiries as they do not affect your credit score at all. Most importantly when you request your own report and score from any of the three credit bureaus, it is counted as a soft inquiry. So doing a self-credit check doesn’t hurt your score at all.
How can one minimize the no. of hard checks?
If you have a very good credit score you may not worry too much about hard inquiries as a few points will not harm you much. But in case you have a low CIBIL score and you wish to get credit in near future then you need to be careful that you are not hit with too many hard inquiries. Multiple inquiries increase your financial risk. Hence it is best to minimize these hard pulls to avoid getting a low CIBIL score. Here’s how.
- Before applying for loans check your credit score. Apply only where you are likely to qualify. This way you can minimize the no. of hard inquiries.
- If you are looking out for the best loan deal possible then make sure you make all your applications within a 30 day period. When credit bureaus notice that you are applying for same size loan they pick up this fact and give a 30-45 day window period for rate shopping. They combine multiple inquiries within this period into just one.
- In case your landlord wants to check your report, ask if you can submit previous rent receipts, income proofs and bank statements to prove your financial reliability.
- Time your important loans like home loans so that there is no hard inquiry six month prior to filing your application. This way even minor factors will not affect your ability to get best possible interest rate on home loans.
If you have a low CIBIL score and you are looking at ways to improve it then you must first focus on factors like payment history, credit utilization ratio and the mix of credit. These have a greater impact on your score. Potential lenders give more weightage to these factors than just the number of hard inquiries. Do not get too bogged down by the number of credit inquiries. If you have a solid credit history then temporary setback to the score caused by hard inquiries will not do much harm to your credit health.