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How Does a Hard or Soft Inquiry Impact Your Credit Score?

Credit bureaus namely TransUnion CIBIL, Equifax, Experian, and CRIF Highmark, account for several factors pertaining to an individual’s financial activities while calculating their credit score. All of these factors are assigned a certain weightage and accordingly have an impact on the individual’s credit score. One of these critical factors is the number of Inquiries made into a borrower’s credit profile, also known as CIBIL Inquiry check.

There are two kinds of CIBIL Inquiries that either a borrower or a lender can make. In this article, we have explained both types of CIBIL Inquiry checks and how they affect your credit score. Read on to know more.

What is a Hard CIBIL Inquiry Check?

Whenever you apply for a loan or any other form of credit for that matter, the lending partner will pull up your CIBIL credit report to evaluate your financial habits and overall creditworthiness. This helps the lender understand how you would manage your finances if the credit is approved, and thus, avoid default. Since the Inquiries are interlinked with your credit application, they go by the name of hard Inquiries.

What is a Soft CIBIL Inquiry Check?

Soft Inquiries are when a particular agency checks just the borrower’s CIBIL credit score in order to pre-approve them for financial offerings. This usually precedes the promotional messages and intimations that you receive regarding the kind of credit cards or loans you are eligible for from a financial institution. A soft CIBIL Inquiry is also when you check your credit report to either understand your credit behaviour/financial obligations, to check for discrepancies, or simply to check your credit score before applying for a loan.

Impact of CIBIL Inquiry Check on Credit Score

The two aforementioned forms of credit information Inquiry methods impact an individual’s credit score in varying degrees. A CIBIL soft Inquiry, for example, has no impact on your overall credit score.

A hard CIBIL Inquiry check, on the other hand, has an impact on your credit score. As mentioned above, lenders conduct a hard CIBIL Inquiry check when an individual applies for a loan or credit card. This helps them understand your financial obligations and your debt-to-income ratio, thereby evaluating your creditworthiness. Credit bureaus keep tabs on the number of hard credit Inquiries made into a borrower’s credit profile. If the checks are infrequent, there is no impact on your credit score.

However, if multiple creditors go through an individual’s credit report often and in a short timeframe, the credit bureaus would categorise the borrower as credit-hungry. This will, in turn, have an adverse impact on his/her CIBIL credit score. Hence, it is advised to not apply for credit from multiple credit organisations at once as well as to keep an interval of at least three months between applications.

Making frequent applications for a loan from numerous lenders simultaneously is one of the few mistakes that a potential borrower can make. The other factors that have a significant impact on one’s CIBIL credit score are listed below.

Factors That Negatively Impact the Credit Score

  1. Missing EMIs/Due Dates: Your payment history has a major effect on your credit score. Hence, it is very important to pay your EMIs and credit cards bills on or before the due date to maintain a good credit score.

  2. High Credit Utilisation Ratio: The percentage of the available credit limit that is used by a creditor at a given point of time is their credit utilisation ratio. It is recommended that a borrower should always maintain a low credit utilisation ratio to improve their CIBIL score, about 30-40% of their income, as having a high credit utilisation ratio impacts the credit score adversely.

  3. Mix of Secured and Unsecured Credit: Striking a balance between the kind of credit one applies for is very important. It is advised that individuals have a healthy mix of both secured and unsecured loans to positively impact their overall credit report. Multiple unsecured loans negatively impact CIBIL scores.

  4. Credit History Length: Credit history gives lenders insight into borrowers’ habits of paying off financial obligations. Hence, an old credit history with excellent repayment habits speaks positively about the borrower’s creditworthiness.

  5. Closing Old Credit Cards: Old credit cards mean a long history, which would be lost if the account is closed. It is advisable to have a long credit history as it adds weightage to a borrower’s credit score, and consequently, their loan applications. Therefore, as long as it is possible, a borrower must avoid closing old credit cards or accounts and only focus on servicing the debt in a timely manner.

  6. Not Checking Credit Reports for Irregularities: It is important for individuals to keep track of their CIBIL report. This scrutiny ensures that the credit bureau is painting an accurate picture of your credit health. Errors or discrepancies in a credit report can negatively impact credit score. In such cases, borrowers need to contact the credit bureaus and have the inconsistencies rectified.

It is recommended that you check your CIBIL score from time to time to stay updated. You can check your credit score for free once on Finserv MARKETS so that you can keep track of your financial habits. You can use this free credit check to gauge your eligibility before applying for our assortment of loans such as home loan, personal loan, and business loan, among others. Apply for a loan with Finserv MARKETS today!  

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