How Shopping for Loans can Put a Dent in Your Credit Score

Credit scores seem so complicated! Let’s simplify it and see why we need it and why looking for the best deals on loans could affect your score. You don’t need to worry about credit score if you plan to live your life without ever taking a home or car loan or borrowing credit for things you want to consume but can’t pay for upfront. Putting your foot into the credit world is risky for yourself, but is also risky for lenders. Lenders need to know if you a credible and if you’d be able to pay back your loan, and they base this on your past credit history.

What is a credit score?

It is a track record of an individual’s credit history, taking into account timely repayment of dues for loans/credit cards, defaults, and loan enquiries. A credit score ranges between 300-900 points. Anything above 750 is considered favorable. Anything lower would mean a harder time getting a loan approved.

You may ask, what if I have never taken a loan or a credit card? It simply may mean that when you do want to apply for a car loan or a home loan, the banks and lenders won’t know what to do with you. You may be in good financial standing, but to the lenders you are guilty until proven innocent. If you are approved for a loan, the sanctioned amount most probably will be very less. So, unfortunately, the world of credit can be a tad bit complicated.

So, the bottom line is taking credit cards, car loans, mortgages, home loans and similar credit helps build your score! But when taking credit, you have to be financially disciplined, make payments on time and be sure to follow the rules. Defaulting on EMIs, late payments, being unable to pay back, and spending over your credit limit can all have a negative impact.

There are four major credit bureaus in India who keep a record of credit scores and reports and disburse them upon request by a bank, company or individual. A fee may be levied for such reports.

These credit information companies work on similar principles, but they differ in cost, services provided and turnaround time.



So what are the ways to build your credit score?

1. Pay all your bills on time.
2. Pay credit card bills in full by the due date. Avoid paying only the minimum due.
3. Have a healthy balance of credit on your credit profile between different accounts and loans.
4. Maintain a balance between secured and unsecured debt.
5. Maintain a good debt-to-income ratio. Don’t take on EMIs and credit card payments that amount to more than 40% of your income.

How applying for a loan could affect your credit score

Once you have a great credit score, and you want to take out a loan to buy a house or a car, you need to check with a few banks to see your eligibility and what they have to offer. But does enquiring or simply applying for a home loan to check which deal is the best, affect your credit score negatively? It does!

When you submit an application for a loan or credit card, a hard inquiry is made and that appears on your credit score. For every hard inquiry, your score can drop about 5 points. If you’ve made multiple inquiries, now you’ve gathered a bunch of them and that’s going to drop your score significantly. Usually if you make a number of inquiries about the same product within a span of 14 days, it will be counted as one.

If you have a higher credit score, a few points won’t matter. But for those who have a lesser score and a shorter credit history, this negative marking will have a greater impact.

Why multiple loan inquiries affect your loan eligibility?

● Multiple hard inquiries will lead lenders to think you may be desperate for finance or that you are trying to obtain too much credit.
● They might assume the worst that you are in a financial crisis.
● It may also cause them to think you have more lines of credit than you are declaring.
● Too many inquiries may also raise a flag for identity theft.

Basically, if you inquire too much, it makes you look credit hungry and this raises red flags for lenders. Hard inquiries stay on your profile for 2 years and disappear, so it only temporarily affects your score. Plus, if your loan is approved, your credit limit available will increase your score.

Final thoughts

Nowadays, with the help of third-party portals, customers can check their home loan, car loan and personal loan eligibility online even before they fill out an application form. Customers can also check their credit card eligibility and find out which banks are willing to offer them one. This helps reduce the need of applying for a loan with multiple banks to find out which one will sanction it. Furthermore, customers can apply online for credit cards and loans without ever visiting the bank.

Stepping into the credit world can turn into a nightmare if you don’t know what you’re doing. You could have a great credit score, and due to an unknowing fault, your score can drop significantly. Learn about the negative and positive impacts on your credit score and you should be set to rule the credit world with smart thinking, efficient savings, resourceful investments and smooth credit.

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