Credit Enquiries

How Credit Inquiries Impact
Your Financial Health?

December 20, 2023 • 409 views

A good credit report shows your creditworthiness, which helps you secure a loan at preferential rates and provides additional benefits. However, financial institutions always do a credit inquiry before lending to you. So, knowing the types of credit inquiries and how they can affect your credit report is important. Keep reading to learn more!

What Are Credit Inquiries?

When you apply for credit, banks or financial institutions request the credit bureaus for your credit report. It includes your credit history, payment history and other financial statements. This report shows your creditworthiness as a borrower. A credit inquiry is of two types - hard and soft inquiries. Soft inquiries do not have any impact on your credit score. But lenders take precautions if there are hard inquiries.

What Are the Types of Credit Inquiries and How Do They Impact Your Credit Report

There are mainly two types of credit inquiries:
1.    Hard Inquiry
Hard inquiries typically affect your credit score and indicate that you are applying for credit, such as credit cards, mortgage loans, personal loans, etc. It is also visible to everyone who is checking your credit report. 
2.    Soft Inquiry 
On the other hand, soft inquiry does not affect your credit score. It happens whenever you check your credit score or get it for free. Unlike hard inquiry, when you make a soft inquiry, it is only visible to you, not to others who check your credit report. 

Why Do Credit Inquiries Matter?

Credit inquiries denote that you are seeking credit. To process your credit request, it is essential to check your creditworthiness. If you have multiple hard inquiries within a shorter period of time, it could indicate credit risk. On the other hand, soft inquiries do not impact your credit report and are only visible to you. It is essential to keep checking your credit score from time to time to check if there are any errors or not. Let us understand about short-term and long-term effects on your credit score:  

The Short-term Effect on Your Credit Score

In the short term, your credit score does not get heavily impacted by a single credit inquiry. However, it may result in a temporary decrease in your credit score. 

The Long-Term Implications for Your Financial Health

In case of a hard inquiry, it could affect your credit score for 2 years. However, most lenders consider credit inquiries in the last 12 months.

ALSO READ :- How to Improve Credit Score in India After Default?

Tips for Minimising Unnecessary Credit Inquiries and Avoid Hard Inquiries

Here are four ways of minimising unnecessary credit inquiries and avoid hard inquiries:
1.    Apply for credit only if it is necessary.
2.    Pay more attention to the essential factors of credit score, like your credit age, credit utilisation, and payment history.
3.    Check your credit score regularly to see if there are any errors in that. In case you find any error, get it corrected immediately. 
4.    When applying for credit, like a mortgage or a car loan, make sure you shop in a shorter time frame to prevent accumulating hard inquiries. 

Strategies to Rebuild Credit After a Credit Inquiry

If your credit score has been impacted due to a credit inquiry, don't worry. Here are 5 things you can do to rebuild your credit:
1.    Timely Payment: Make sure you pay all your EMIs on time. If you miss any payment or make late payments, it can negatively affect your credit score. 
2.    Credit Utilization: You must maintain a balance between total credit and usage. It is always advisable to use 30% of your total credit.
3.    Limit Your Credit Applications: Avoid new credit applications to avoid inquiries. 
4.    Diverse Credit Mix: You can take multiple types of loan accounts you have, such as personal loans, mortgage loans, etc, to rebuild your credit.  
5.    Monitor Credit Report: Check your credit report from time to time; if you notice any error, get it corrected by filling out the dispute form.

Tips to Improve Credit Score

To Conclude

A credit inquiry may impact your credit score or CIBIL Score negatively if multiple hard inquiries are made. it is necessary to know that soft inquiries do not affect your credit score, but hard inquiries do. So, take preventive measures, such as making timely payments, limiting your credit application, diversifying your credit mix and monitoring your credit score from time to time. To keep a track of your credit score, you can use our free credit score checker.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

We are a team of expert writers and editors passionate about providing our readers with authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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