Rajesh is a software professional based out of Hyderabad. He had just started working and had moved to Hyderabad from his town. On his outings to the malls, there were always people asking him to apply for a loan or credit card. Without giving much thought, he applied to all that was offered to him. He even applied for loans offered over the phone or email.
He was approved a credit card and personal loan initially and then it stopped. But that didn't bother Rajesh. This went on for a few months, till he applied for a loan to buy a bike.
His loan application was rejected while he regularly paid his personal loan installment and his credit card dues. He was told that his credit score was not good, which left him perplexed.
When he checked his credit report on CreditMantri, he realized that he had about 8 hard inquiries in a period of 10-12 months, which was the main culprit of his low credit score.
In his credit report analysis, it was mentioned that he should not apply for any further credit. He immediately stopped applying for any further credit for a sustained period of time.
Are you one of those wondering what is the big fuss about hard inquiries and your credit score?
Do not worry! We are here to clear your doubts and guide you with the right advice.
What is a Hard Inquiry?
A hard inquiry is made when you apply for a credit product, be it loan or credit card, and the lender fetched your credit report from the credit bureau to determine your creditworthiness. All the hard inquiries made by all the lenders are shown in your credit report. It is one of the factors your credit score depends on.
Hard Inquiry vs. Soft Inquiry:
Credit Report fetched by lenders from Credit Bureau
You make the inquiry for your credit score yourself
Affects your Credit Score
Does not affect your Credit Score
When you apply for credit products like loans or credit cards
When you (or your employer) check your credit score
Multiple hard inquiries can lead to loan/credit card rejection
You can make as many soft inquiries without a worry
What is a Credit Score?
A credit score is a 3-digit figure ranging from 300 to 900 and is an indicator of your creditworthiness. It is assigned by the Credit Bureaus in India based on your credit-related data reported by your lenders to the bureaus. As widely understood, higher ranges of credit score denote better grades of creditworthiness. According to experts, a score above 750 is preferable for you to be eligible for any kind of credit at favorable terms.
What is a Credit Score Based on?
Everything related to your credit behavior right from the application to credit, its approval, your regular or irregular repayments, till the closure of the loan or credit card is reported by your lender to the credit bureaus.
The main factors that affect your credit score are:
- Your credit accounts: All your loan and credit card accounts are taken into consideration for calculating your credit score. While positive accounts are good for your score, a negative account where repayments are outstanding do not bode well for your score.
- Your repayments: When you borrow a loan from any lender, the basic premise on which you borrow is that you will pay back the installments promptly on time. When you default or delay your installments, you are not honoring that commitment which reflects poorly on your creditworthiness and hence, pulls down your credit score.
- Credit Utilization Ratio: This depends on how prudently you use your credit card. A credit limit is set on your card considering your income and other debt commitments. However, that doesn’t mean that you can end up spending the entire amount each time. The ideal spend on a credit card which is also called the credit utilization ratio should not exceed 30% of your credit limit.
Additional Reading: How can you lower your credit utilization ratio?
- Credit History: Lenders like to lend to seasoned borrowers who have long history of dealing responsibly with credit. Therefore, before closing your good credit card accounts, pay attention to the impact it may have on your credit score.
- Credit Mix: An individual with a good mix of secured and unsecured borrowing has a better credit score than an individual who just has more of unsecured borrowings.
- Hard Inquiries: Each time you apply for a credit product, your lender pulls up your credit report from the credit bureau to check your creditworthiness. Each of these inquiries that the lender does with the bureau is counted as a Hard Inquiry. Increased hard inquiries affect your credit score.
- Now that we know which are the factors that affect your credit score and that hard inquiry is also one of them, let us go on to explore how hard inquiries particularly affect your score.
Additional Reading: How can you determine if you have a low credit score?
Hard Inquiry and your Credit Score
As we pointed earlier, each time your lender checks your credit score with the credit bureau, it is considered as a Hard Inquiry. And it is relevant to also know that any inquiry with the credit bureau is considered as a hard inquiry, irrespective of the fact that the credit product (Loan or Credit card) that is applied for is approved or not.
The reason behind this is that increased loan or credit applications signify that an individual is not able to meet his expenses or needs out of his income and is therefore, constantly applying for credit. The individual applying for too many loans or cards is construed as a credit hungry person.
Lenders look for borrowers who can manage their expenses well and pay EMIs on time. On the other hand, an individual who keeps on applying for credit frequently cannot be thought of in the same light. Therefore, increased frequency in applying for credit takes your credit score down.
This is what happened with Rajesh. He wasn't aware of the consequences of frequently applying for credit and indiscriminately applied for various loans and credit cards. Though he was not particularly looking for any credit, he was looked upon as a credit hungry person, thereby his credit score went down.
Therefore, we would advise you to act with discretion while applying for credit. Do it only when you are serious about your need for loan or credit card.
Soft Inquiry and Credit Score
Considering the fact that hard inquiry brings down your credit score, there is often a myth surrounding individuals checking their credit score. Many people think that checking credit scores by themselves also results in low credit scores.
We would like to clear the air here: checking credit scores by the individual himself is not considered as a Hard Inquiry; it is called a Soft Inquiry. In fact, the RBI has directed all credit bureaus to allow an individual to check his/her credit score and credit report once a year, free of cost.
However, thanks to fintech companies like us, you need not wait for one year before checking your credit score. You can check your score as many times as you like here. In fact, we would advise every individual to check his /her credit score at least once in every 3 months to make sure you are credit healthy and if need be you can take steps to bring your score up.