Overview
The Indian financial landscape has been dynamic and evolving more than ever. In such times it is critical to comprehend the necessity of maintaining a good credit score. Credit score is a vital metric used to assess the creditworthiness of an individual/ business entity.
Whether a person or entity wishes to apply for a new loan or credit card, maintaining a good credit score requires knowledge regarding the specifics of the credit score. Low credit score affects creditworthiness of the borrower which might be especially frustrating during trying circumstances such as medical emergencies, house renovations, etc.
Hard Inquiries are those credit inquiries that have a potentially adverse effect on the borrower’s credit score. Thus, whether the borrower is applying for credit card, loan, mortgage, each inquiry may have an impact on the credit profile and creditworthiness.
What is Hard Inquiry and Why is it Done?
Hard Inquiry/ Hard Pull could be understood as a formal request made by certain lenders and organizations to assess possible risk. Seeking hard inquiries will typically have some negative effects and lower the borrower’s credit score by certain points. Lenders will seek credit reports from any one or more credit agencies such as Equifax, TransUnion CIBIL, Experian, or CRIF Highmark.
The credit rating systems take into consideration the duration of the inquiries made by the lender. Thus, borrowers who are searching for best offers on credit card or business loans should be confident that several inquiries made within a period between 14-45 days will be regarded as a single inquiry.
If there is a hard inquiry is listed on a borrower’s credit report, it could indicate-
- The borrower requested issue of new credit cards during the past two years;
- The borrower received fresh loans from the lending institution (i.e. personal loan/auto loan/education loan, business loan etc.)
- The borrower applied for balance transfer card/loan;
- The borrower requested enhancement of credit limit on its existing credit card.
Hard Inquiry and Its Impact on Credit Score
How do Hard Inquiries affect Credit Scores?
Depending upon their entire credit history and the number of hard inquiries received by credit agencies, hard inquiries affect the credit score of the borrower. While borrowers with strong credit scores have only minimal impact on credit score for a single hard inquiry, low credit score could fetch a significant adverse impact on credit score.
While each hard inquiry may lower credit rating by only a few points, altogether such inquiries have a more substantial and lasting impact on the borrowing ability of a debtor. It is also to be noted that multiple hard inquiries within a short period might indicate significant lending risk for lending institutions. It may be an indication that the borrower is heavily dependent on loans with little savings insufficient to fulfill his/her primary expenses.
How Long Does a Hard Inquiry Reflect on the Credit Score?
Whether the changes are positive or adverse to the credit score, it would take around 30-45 days normally to take effect. It happens as the credit bureaus such as CIBIL get credit activity reports from lenders which are later updated by bureaus. However, other factors affecting credit score changes might be due to-
- Lender Reporting Cycle- Lenders frequently inform credit bureaus about credit activity every month specifying details such as new accounts, payments and account closures.
- Credit Bureau Processing Time- After receiving information, credit bureaus process the data and make changes on the credit report of the borrower. The time involved for information processing may be shorter or longer depending upon the protocols followed by the Credit Bureau.
- Disputes and Complaints- Where the credit bureau receives any complaint over any information, it takes up to three months to complete the investigation.
- New Credit and Loan Activity- Where an individual or business has applied for a fresh credit facility, the credit score may be changed faster as such changes are reported earlier by lending institutions.
How to Minimize Hard Inquiry?
Hard Inquiries can temporarily lower credit scores but they are not necessarily a bad thing. Nonetheless, it’s preferable to comprehend strategies to reduce the quantity of hard inquiries that may appear on the credit records. Here are some necessary strategies to reduce the number of hard inquiries on credit reports-
- Plan and organize your credit application- Any individual or business entity wishing to seek fresh loans from lending institutions shall take time to research, compare and apply for selected institutions. Multiple applications randomly with different lenders could potentially increase hard inquiries.
- Adopt a selective and cautious approach- Proactively seek for loans which could fulfill their financial requirements. It would be a good idea to not make too many hard inquiries for loans/credit products which are not required by the borrower.
- Regularly monitor credit reports- Before making an application for fresh credit, ensure that the applicant qualifies through review of credit report and credit score.
- Don’t sign up for rewards only- It is advisable to not to seek multiple credit cards only for the sake of rewards or bonuses only.
Hard Inquiry vs Soft Inquiry – Differences
Hard Inquiry |
Soft Inquiry |
|
| Meaning | Where a lending institution seeks credit records of the applicant borrower by making a formal request to credit bureaus during the credit application process, it is known as Hard Inquiry. | Whenever the borrower either by himself or anyone else scrutinizes the credit records and scores, it is known as Soft Inquiry. It has nothing to do with credit lending processes. |
| Impact on Credit Score | Could lead to a temporary drop in the credit score of the borrower. | Does not create any negative impact on the credit score of the borrower. |
| When does it happens | It usually takes place whenever a borrower applies for credit after which a lender seeks a credit report reaching the decision whether or not to approve new credit cards or loans, etc. | It could happen due to one or more reasons such as-
|
| Requirement of borrower’s consent | Requires borrower’s consent. | Doesn’t necessarily require individual/business entity’s consent. |
Conclusion
Therefore, Hard Inquiries may certainly appear sooner or later in the credit records of the borrower. However, prospective borrowers or even borrowers with pre-existing loans should adopt a proactive approach to minimize them by picking their application methods and timing carefully.
Loan inquiries, especially the ‘Hard’ ones have a crucial impact on the manner of determination of credit scores. Effective management of credit applications, engaging with specific credit bureaus and related experts, and staying aware of their impacts could all assist borrowers to protect their financial reputation.
In case of doubt it is advisable to take help of experts like BankKeeping who can help negotiate better with the banks so that SME Businesses can avail better credit facilities reducing major impacts of hard inquiries in the past.
FAQs
What is Soft Inquiry?
When a credit check is performed for purposes other than lending funds it is referred to as a Soft Inquiry. Provided below are some key reasons behind someone making a soft pull or soft inquiry –
- Examining personal credit score- Individual/Business entity checking their own credit reports for tracking their credit score.
- Loan Pre-Qualification- Borrowers looking for best possible interest rates on loans and pre-qualified loans might cause lenders to do soft inquiry on them.
- Promotional Offers-Businesses might check the credit score of an individual/business entity in order to identify whether they are eligible for promotional offers or not.
- Background checks for employment– Employers may check credit records of job applicants as a part of their employee screening processes.
- Rent/Leasing Building/Apartments- Individuals/Businesses renting or leasing a building or an apartment may need their credit records to be verified by the owner.
- Account Servicing– In order to determine whether or not to modify terms of an existing account such as increasing or lowering credit limit, or to ascertain whether or not a person/entity is eligible for incentives, certain financial institutions may periodically perform soft inquiries on their clients.
Do all hard inquiries affect credit scores?
Hard Inquiries affect the credit scores, but the effect is often brief and minimal. It usually takes a few months for modifications in the credit score after rigorous investigation made by credit bureaus.
How to remove hard inquiries from a borrower’s credit records?
It is not possible to eliminate a lawful and verified hard inquiry from the credit score of the borrower. Although, if there are any reasons to believe that a specific inquiry was unsanctioned or fake, the borrower may dispute the same with credit agencies along with the request to get it removed. Typically, the procedure entails getting in touch with the credit bureau, explaining the content of the disputed query, and supporting it with necessary paperwork.
How many hard inquiries are, okay?
Normally, receiving one or two hard inquiries during a year does not have any large impact on the credit score of the borrower. However, receiving three or more inquiries during a period of six months could become a concern for lending institutions posing significant financial risk. Hard Inquiries have a gradual decline in impact over a duration of maximum two years.
What triggers a hard inquiry on your credit report?
It is likely for a lender to conduct hard inquiry in regard to the borrower in case –
- Has applied for fresh loans/new credit card in the past two years;
- Sought credit facilities to avail auto loan, home loan, education loan, mortgage loan, etc.;
- Applied for a balance transfer card or similar credit facility, or
- Applied for a business credit card or has requested an increase in credit limit.