When you apply for loans – personal loan, home loan, business loan and car loan – and credit cards, lenders check your credit score along with other eligibility criteria to ensure if you are eligible to get credit. Credit score is one of the very important factors which help lenders know your repayment capacity. To know your credit score, lenders get you credit report from any of credit bureaus. If your credit score is good, lenders approve your application for a loan or credit card. Individuals with a poor credit score may not be able to get loans and credit cards from mainstream lenders. Moreover, a credit score also impacts rates such personal loan interest rates, home loan interest rates, credit card interest rates etc.
In this piece of article, you will understand everything about credit report, credit score and factors that impact your credit score.
Credit score
A credit score is a representation of creditworthiness of individuals who availed credit cards or loans from any authorized lenders based on a level analysis of their credit history. It is expressed in three digits ranging from 300 to 900 based on a credit report information received from any of credit bureaus, typically CIBIL (Credit Information Bureau India Limited). Higher CIBIL score helps in reducing personal loan interest rates and rates on other modes of credit.
What is a credit report?
A credit report incorporates personal information such as a borrower’s name, phone number and PAN number. Only individuals who got a loan or credit card will have a credit report. A credit report also lists a borrower’s credit history such as number and type of loans and credit cards the borrower has or had in the past, and the status of that credit – paid on time, pending or defaulted. A credit report also includes credit inquiries such as hard inquiries or soft inquiries.
When someone applies for a new loan or credit card, lenders request a copy of the applicant’s credit report. The request of the credit report is known as a soft or hard inquiry. Lenders examine the credit to evaluate how risky an applicant is based on his/ her credit history.
What is a hard inquiry?
A hard inquiry is a credit report sought by a lender from a credit-reporting agency. When someone applies for a new loan or credit card from banks or NBFC, a bank requests the credit reporting agencies to provide a copy of the credit report of the borrower. Banks get the credit report to know about the applicant in detail before approving his/ her application. A hard inquiry, also known as a hard pull, happens only when an applicant authorizes a lender to pull his/ her credit report. Lenders retrieve borrowers’ credit report using their PAN number.
Apart from someone’s payment and credit history, the credit report also lists the number of hard inquiries made in the last two years.
If your credit report is accessed by loan providers, insurance companies and other financial institutions without your permission, it amounts to be a soft inquiry. Soft inquiries include less information than hard inquiries and have no effect on your credit card. On the other hand, hard inquiries can prove to be a little counterintuitive. Lenders may consider you as an irresponsible borrower in handling your debt. Multiple hard inquiries may also indicate that you are at the risk of overspending.
How long hard inquiries stay in a credit report?
Hard inquiries linger on someone’s credit report for two years. Too many inquiries in a short period can temporarily hit your credit score by some points. However, the impact of hard inquiries starts to fade away long before they are removed from your credit report. However, it is recommended not to apply for multiple loans or/and credit cards carelessly. Doing so will be considered as an attempt to overborrow, creating higher risks for lenders.
Can hard inquiries be disputed?
It is advisable to check your credit report periodically. It helps in ensuring that your credit report is error free. However, if something seems amiss like the report has a hard inquiry from a lender you have not authorised, immediately dispute the error.
A credit report can be accessed for free from any credit bureaus before you apply for a new loan or credit card. It helps you understand as to when you should apply for new credit and you also get to view an error in the report, if any, so that you can dispute it immediately.
Is it possible to avoid hard inquiries?
Well, making a few hard inquiries won’t hurt your credit score. You should not stop getting your credit report, but you should minimize them. However, before applying for a personal loan or credit card with a lender, you should go through the eligibility criteria of the lender. Make sure you don’t apply for a loan that you don’t qualify for. It is not only a hard inquiry but a rejection as well. Apply for credit you are eligible for. Eligibility criteria vary from lender to lender. For example, eligibility criteria for Allahabad Bank personal loan vary from that for HDFC Bank personal loan or ICICI Bank personal loan.
When searching for loans, stop applying for loans with multiple lenders, instead use online platforms that have multiple lenders on it. With online platforms, it is easy to know your eligibility and compare rates from multiple lenders.
Soft and hard inquiries - examples
The simple difference between soft and hard inquiries is when financial institutions or insurance institutions get your credit report with your permission, it is considered as a hard inquiry, and when your credit report is accessed outside your knowledge, it is considered as a soft inquiry. Here are some examples of a soft inquiry and hard inquiry:
Common hard inquiries
New loan/credit card application
Mortgage application
Line of credit application
Insurance application
Common soft inquiries
Pre-approved credit card offers
Pre-approved loan offers
Pre-approved insurance offer
Everyone must request their free credit report from any of credit bureaus to check their credit score. Find out whether hard inquiries on your credit report are allowed by you or are instances of fraud or identity theft. If you find anything fishy or controversial, immediately dispute the same with the credit bureau immediately.
A higher CIBIL score, typically above 750, means lower personal loan interest rates. For example, interest rates for Allahabad Bank personal loans are determined based on the monthly income and credit score of a borrower.