Credit score is a three-digit score given to you by credit bureaus that acts as a reflection of your credit profile and your creditworthiness to your creditors. Multiple loan applications from different creditors can negatively affect the 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 credit applications impact your credit score and discuss the ways you can minimize the impact:
Types of questions: hard versus soft
When you apply for a loan or credit card, the lender will run a credit check to determine if you qualify. These credit checks, also called inquiries, are divided into two types:
Difficult questions:A hard inquiry is considered every time your lender requests your credit report during the loan application process. Any hard inquiries placed on your credit report will be reflected and impose a temporary penalty on your credit score.
Soft questions:Such moments are when you checked your own credit score or when you received a notification from a lender who had pre-approved your offer. Soft inquiries do not affect your credit score.
How multiple loan applications affect your credit score
Drop in credit score:A hard inquiry done when applying for a loan lowers the credit score slightly if you ask multiple questions. A few questions won’t really hurt your score, but many questions within a limited time frame will do more harm than good. However, this will only affect your credit score temporarily.
Credit hunger:Asking multiple questions makes it appear to lenders that you need credit and may be a sign that you may not be able to repay your current credit.
Impact on approval chances:If your credit score becomes 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 the amount you want or an increased interest rate or a complete rejection of your application.
Duration of impact:A hard inquiry generally lasts up to 24 months on the credit report. However, its effect diminishes after some time if you have a clean credit record through timely payments on your existing credit.
How to minimize the impact of credit applications
Plan your loan applications: Do not apply for multiple loans at the same time. Avoid applying for credit facilities within a short period of time as this will lead to a group of hard inquiries that will lead to a drop in your credit score.
Check for pre-approved loans: Many lenders offer pre-approved loans for which they will let you know if you qualify without affecting your CIBIL score. This is counted as a soft inquiry that will 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 loan offers from your lenders and minimizes the need for hard inquiries.
Consider loan aggregators: Loan aggregators compare different lenders for you based on your credit score and provide you with available offers that you may qualify for.
Keep your credit report: Checking your credit report can help you keep track of your credit and see if there are any discrepancies in the report. If you find one, you should contact the credit bureau immediately and get it repaired urgently to avoid lowering your credit score.
In short, you need to be aware and take careful measures to keep your credit score healthy at all times as this will help you get the best deals on your loan and get the lowest interest rates. However, before you even consider applying for a loan or a credit card, you should first assess whether you really need it or not. This will allow you to make wise decisions and not end up in a financial obligation that you were not ready for.
(Please note: Taking out a personal loan carries its own risks)
