Loan enquiries affect your credit health

Avoid making multiple applications to different financial institutions for the same loan

Few individuals know their credit score and even fewer know about what a credit enquiry is. This little known term can have a significant impact on your ability to access credit. It appears at the bottom of your Credit Information Report (CIR) in the section that lists the enquiries made on your report and is of special interest to lenders and credit card issuers. What do these terms mean and how do you avoid damage to your credit score arising from these queries?

An enquiry occurs when a potential lender or credit card issuer accesses your CIR to determine your credit-worthiness in order to decide to approve your application. For instance, when you apply for a home loan, the bank that you apply to will put in an enquiry for your CIR. This allows them to get detailed information about your credit history and behaviour, and influences their lending decision.

So how does an enquiry impact your credit score? It is good to know that a single enquiry on your CIR will only marginally lower your credit score. Moreover, other factors like your payment history and credit utilisation are given more weightage when calculating your credit score.

The trouble starts when you have several enquiries on your CIR. This occurs when you make multiple loan applications in a relatively short time frame, which automatically leads to an increased number of enquiries on your CIR. For example, you might decide to apply for several credit cards, hoping to increase your chances of success by applying to multiple lenders simultaneously. However, each of the banks will make an enquiry, leading to a significant lowering of your score. Or take another scenario. You might want to buy a house and car and make loan applications for both within, for instance, two months. Each of the loan applications will result in a separate enquiry which is detrimental to your credit health because it implies that you are ‘hungry’ for credit.

Potential lenders will be wary about lending you money when they see numerous enquiries on your CIR as it reflects that you are in urgent need of credit and need to apply to several sources. Lenders consequently tend to get nervous about your spending discipline and your ability to repay your loan obligations. At best, you will have harsher terms and conditions on your loan or credit card so that lenders feel they have some safeguards against default. At worst, your application may be rejected.

When you check your own CIR, this does not qualify as an enquiry and will not impact your credit score. For example, you can check your credit score as many times as you like without it having any impact on your score.

So how can you minimise the number of enquiries on your CIR?

• Avoid making multiple credit applications to different banks or financial institutions for a single purpose (that is, several applications for a single credit card or loan)
• Avoid making multiple loan applications within a short period of time, even if they are for different purposes (for example, applying for a housing loan and auto loan at the same time)
• Apply for a loan or credit card only where you think you have the greatest chance of being approved. This eliminates the need for a large number of applications and the resultant enquiries

In mature credit economies like the US, potential employers, utility companies or landlords routinely access your CIR to check your creditworthiness and that could be the case in India as well. It is impossible to avoid enquiries entirely if you are in the market for credit but it is vital to avoid the temptation of applying to several sources to maximise your chances of success.  Finding a balance between the two will ensure that you do not do unnecessary damage to your credit score.

The writer is CEO & co-founder of CreditMantri