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Understanding Hard Inquiry and Its Impact on Credit Score

Understanding Hard Inquiry and Its Impact on Credit Score

Your CIBIL score lets you understand your credit status. While it helps you manage your finances, it also lets the lender assess your eligibility. The credit score, altogether, reflects whether you are a risky or non-risky borrower. A higher credit score may speed up your loan application. So, when you request a new type of credit, like a credit card or loan, a "hard pull" occurs from the lender's side. Also regarded as a hard inquiry, it reviews the borrower's credit file to assess risks. Welcome to this all-encompassing post, where you will learn about hard inquiry. Also, you can understand the hard inquiry's impact on your credit score.

Introduction to Hard Inquiry - (Ins & Outs)

Suppose you apply for credit from a financial institute, bank, or credit card company. The lender asks you to review your credit history before approving your request. That's a hard inquiry, also known as a hard pull. It occurs when the lender or financial institution evaluates your creditworthiness as a borrower. Compared to a soft inquiry, which mainly involves background screening, a hard pull examines your credit history, considering the credit report.

So, each time you consult a bank or credit card company, you must review your CIBIL history beforehand. Lenders consider your CIBIL reports the best tool for assessing your past and present financial performance before they approve your loan request. The credit inquiry usually evaluate your payment history, loan and credit card amounts, etc.

Repeatedly missing your credit card payments may reduce your chances of loan approval. In such circumstances, your lender may think you will do the same thing in the future. So, they end up rejecting your loan application. Alternatively, some lenders may approve your application with a higher interest rate.

You may also read this: Factors that Decide Personal Loan Approval

Hard Inquiry Process: How Does It Occur?

A lender asks for the borrower's complete credit history from a credit reporting agency through a hard inquiry. The lender may choose a credit agency based on their requirements. Some offline and online agencies offer in-depth insight into the candidate's credit score, depending on various aspects.

The lender or financial institute reports the hard credit request on the credit report from the creditor. It may reduce the borrower's hard inquiry credit score if they have multiple hard inquiries within a short time. Additionally, it results in a higher risk of rejection of their loan application.

Understanding How the Impact of Credit Scores in India

Credit scores in India are a significant consideration when it comes to financial transactions. The credit score lets lenders assess the risks associated with the money-lending process. Your CIBIL credit is crucial when it comes to collateral-free or unsecured loans. It may affect the eligibility for personal loans too. Various parameters evaluate the credit score. Some of them include the following:

  • Your payment history
  • Your owed amount
  • Your credit history's length
  • The new credit
  • Credit mix

Hard Inquiry's Impact on Credit Score:

How Hard Inquiry Affect Your Credit Score?

The impact hard inquiry on credit score may be negative on the borrower's credit score if it's for the short term. The hard inquiry is on the credit report for about two years. So, it impacts the overall credit for a year or two by less than five points. Getting multiple hard inquiries within a short period may indicate that the borrower has applied for various loans and could not repay them.

1. A Reduced Credit Score

The impact of any hard inquiry on the credit score isn't permanent. The credit bureau thinks the borrower is pursuing a new credit when a lender asks for a hard inquiry. That potential risk may result in a reduced credit score temporarily.

2. A (Temporary) Low Credit Status

Credit scores can identify the borrower's nature of repaying the loan and applying for new ones. However, a hard credit check temporarily reduces your credit status.

3. Adds a New Credit Component to Your Score

Hard inquiry indicate that you have applied for a new credit. It determines how often you open new accounts. In addition, it may influence a small portion of the overall score. Lenders use it to evaluate how actively you can manage your credits.

4. Loan Approval Reduced with Multiple Hard Inquiries

One hard inquiry might have a minimal impact on the CIBIL score. However, multiple hard inquiries may be risky for lenders and borrowers. For borrowers, it may affect their chances of getting their loan approved.

Lenders may think of these multiple recent inquiries as financial stress. When they see various inquiries about your credit history, they will become cautious about approving your loan.

However, there are ways to avoid hard inquiries. For instance, in auto loans or mortgages, some credit bureaus consider that you submit the application to various lenders for comparing rates.

So, they might not opt for a hard credit check to assess the score. On the other hand, applying for different credit cardsalong with a personal loan may be a warning sign. That indicates that you are searching for credit that you cannot afford.

When a Lender Opts for Hard Inquiry?

The following are the times when a lender may send a hard inquiry to assess the borrower's credit history:

1. While Applying for a Loan

Suppose you have applied for a home construction loan or a personal loan. The lender or financial institute will send a hard inquiry to understand your creditworthiness. That determines the risks involved with the lending process. Credit card issuers must understand your credit status before approving or rejecting the loan application. It helps them assess your credit usage and payment history.

2. Getting Your Mortgage Loan Approved

Did you know that applying for a mortgage loan may cause a little dip in your hard inquiry credit score? That's because lenders may run a hard inquiry on the credit. Each time the lender conducts the hard inquiry, it will appear on the credit report. So, there will be a small reduction in the score.

Note that mortgage loans come with longer repayment payments and larger amounts. So, lenders need to evaluate your financial responsibility. They assess this parameter by running a hard inquiry and get a better understanding of your creditworthiness.

3. While Applying for Increasing Your Credit Limit

Your credit card issuer might perform a hard inquiry on the hard inquiry credit score and status when you require an increase in the credit limit. However, this might lower the credit score temporarily, but it diminishes its impact over a few months or a year. When your credit limit is higher, it might be because of the hard and soft inquiries.

4. Applying for a New or Multiple Credit Cards

Applying for a new credit card requires a credit check. The issuer may assess your credit history to evaluate your credit limit and the card's terms. Alternatively, if you want to apply for multiple credit cards within a short timeframe, your application may trigger hard inquiries.

You may read this: Disadvantages of Multiple Credit Cards

Wrapping up

So, you now know that a hard inquiry credit score is a critical part of the credit file. However, they should occur strategically and sparingly when comparing financial product rates. You can keep an eye on the impacts of hard inquiry on your credit and manage your score accordingly.

The best way to manage your score is by checking your report frequently. Have you seen any inquiry that you did not make earlier? The borrower can dispute these unauthorized inquiries as errors with the credit bureau. You must be attentive to ensure that hard inquiry impact your score positively.

The borrower must plan their application to avoid making multiple applications in one go. Please perform your research and apply for the credit only when you think it's necessary. With the above things in mind, you can check the credit report regularly.

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