Does Applying for Loans Affect Your Credit Score?

If this is your first time applying for any loan, know that your credit score might register a slight dip right after you file your application. Fret not! This is fairly common and is not a blotch on your creditworthiness.

Your credit rating awarded by CIBIL is an assessment of your current financial health. Applying for hefty finance, especially with multiple lenders, can result in a hard credit check. This phenomenon is responsible for shaving a few points off your CIBIL score.

What is a hard credit check?

When you apply for any loan – be it housing finance or a personal loan, potential lenders inquire about your past financial history. They do this to assess how safe it is to lend you money.

Now, you might have assessed your score a couple of times, which is called a “soft” inquiry. In contrast, when a lending institution reaches out to CIBIL (online or offline) to learn about your borrowing history, it is called a “hard” inquiry.

A hard enquiry or a CIBIL score check is not detrimental to your long-term credit rating, but you will likely see a temporary drop in your short-term score. This is true for every borrower who formally applies for a loan.

Can I escape hard checks?

There may be no way to entirely escape a hard check while applying for a significant loan. But, you can definitely improve the dropped off points by making timely repayments. If you don’t default on any of your EMI payments, rest assured, your credit rating will be restored to its original glory rather quickly.

Here’s an insider tip: You can avoid or minimize the effects of a hard check with the help of the following steps.

If you can find a lending institution offering a pre-approved loan for a specific amount, engage with them quickly. Pre-approved offers typically don’t involve a credit score check.

Be sure to check all of the loan eligibility criteria thoroughly before applying. See that you fulfil them. Doing this reduces your chances of rejection. A rejected application means you won’t get the funds, and your credit score will fall a little due to the hard check performed on your application anyway.

Once you’ve got the loan, avoid applying for another one for at least a few months since your credit rating might be lower than usual. And, in the meanwhile, keep up with timely repayments. After six months or so, you’ll find your credit rating going up thanks to responsible EMI payments. This will provide you with a window to apply and get approved for a second loan. You can even avail of a top-up on the same loan.

The bottom line

If you already have a healthy CIBIL rating, a few lost points right after a hard check won’t dent your future borrowing credibility. If not, improve your credit rating by repaying your credit card bills and ongoing EMIs on time.

Are you thinking about applying for a loan? Well, perform a soft credit rating check before doing so. Don’t worry. A soft inquiry occasionally doesn’t affect your credit score.