Lenders or prospective lenders must undertake due diligence before disbursing loan amounts to their borrowers. This due diligence is conducted in two ways – hard enquiry or soft enquiry and impacts the credit score, thereby impacting the borrower’s eligibility.
A hard enquiry is a type of credit information accessing the credit account of the borrower. The borrower’s credit history is evaluated, and the decision is made to approve or reject the application for credit.
A soft enquiry or soft pull is a check to understand how well the borrower manages their credit. This aspect is a sense check by the borrower and does not impact the credit score.
The borrower need not be contacted before the enquiry is being conducted, and it is the responsibility of the borrower to maintain financial discipline, which in turn will impact the CIBIL score. With respect to hard enquiry:
- Monitor the number of loan applications as too many of them reduces the credit score.
- Long-term secured loans such as home and auto loans expand the range of credit mix. It further demonstrates the borrower’s experience of handling various types of credit. Over the tenure, if timely payments are made, the CIBIL score will increase. On the flip side, too many unsecured loans would attract additional scrutiny.
- Repayment pattern is monitored as it demonstrates borrower’s ability to handle debt. Timely payments will enhance the credit score, and unnecessary delays would negatively impact.
- Credit limit is taken into consideration, especially for credit cards. A high credit score raises concerns about a higher debt burden, which can go against the CIBIL score. It should also be noted that no utilisation of credit limit may also cause concern for the lender. A safe bet would be to maintain the credit utilisation under 30% of the credit limit.
In case of soft enquires, the following can be considered:
- A check of the CIBIL score would be sufficient to gauge the borrower’s overall performance.
- Self-assessment of a credit report by the borrower.
- Credit card companies checking credit to send across pre-approval offers.
One can follow various tips over the course of the financial journey to ensure a healthy credit score, thereby making such inquiries a mere formality.
- Consistently make payments of the loan EMI’s and credit card bills on time.
- Ensure online credit score has a healthy mix of secured and unsecured credit.
- Develop a habit to check own online credit score and CIBIL report for monitoring any discrepancies.
- Avoid having too many loans and active credit cards simultaneously.
CIBIL score is a benchmark utilised by the financial community to assess a prospective borrower’s financial dependence. The higher the score, the greater would be the chances of procuring higher amounts with minimum hurdles.
Conducting such inquiries is essential to ensure the funds disbursed are utilised for legitimate purposes and can be tracked since it’s a long-term commitment. One should not evade such a process and ensure fair participation at timely intervals. Over time, this would imbibe a sense of financial discipline, and these inquiries would be a formality to maintain specific records.