Shopping for home loan can hurt you!

How and why too many credit inquiries can hurt your CIBIL score and hence make lenders wary of lending to you

Shobha Kadam had been shopping around for home loans. Like every vigilant shopper she called up many banks to check on rates and other terms. She then applied for a pre-approved loan in three of these banks so that she could finalise on her home purchase deal.

While Shobha believed that she was acting in a responsible manner to check rates and get approvals before proceeding. Little did she know that she was damaging her credit score by what is looked at by credit agencies as "credit hungry behaviour" by triggering credit inquiries!

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

What are inquiries?

Credit inquiries are records created when someone looks at your credit information. Credit inquiries are classified as either "hard inquiries," or "soft inquiries".

When a bank pulls up a credit report upon receiving your application for credit, an inquiry is made on CIBIL -- such inquires are called "hard inquiries".

However, when you pull your own credit report or when the lender does a periodic review of existing accounts, the inquiries done are called "soft inquiries".

Soft inquiries are not seen by others, and do not have any impact on your CIBIL Score.

When you submit a credit card application or a loan application, a hard credit inquiry appears on your credit report and may have an effect on your credit.

How do inquires affect your credit score?

1. The impact of credit inquiries will differ from person to person depending on their own unique credit history. An inquiry can have a greater impact if you have lesser accounts and a shorter credit history.

2. An inquiry can lessen your credit score by around 5 points

3. Too many credit inquiries may cause potential creditors to question whether you are trying to obtain too much credit or are in some sort of financial crisis. It makes them wary against lending to you

4. Multiple inquiries also raise the red flag about identity theft. It serves to alert you of a possible identity theft in case you have not been making those inquiries

All the inquiries that you have made so far remain on your credit report. However, while calculating credit score, bureaus usually only look at the inquiries on your report for last two years. So, don't panic if you have shopped around for loans in the past. Make sure you take proper measures while shopping for loans in the future. Check your own CIBIL Report and CIBIL Score before you approach a bank for a loan -- when you inquire for your own report and score, your inquiry does not bring down your CIBIL Score as the inquiry is considered as a soft inquiry.