How Credit Inquiries Affect Borrowers?

According to a 2023 TransUnion CIBIL report, 79% of Indians are unaware of the impact of credit inquiries on their scores, leading to uninformed borrowing decisions. Additionally, a study by the Reserve Bank of India (RBI) found that only 20% of Indian consumers regularly check their credit reports, despite evidence showing that those who do are 60% less likely to default on loans. (Source).  

A survey by Experian India also revealed that 45% of credit card users in metropolitan areas apply for multiple cards within six months, unknowingly reducing their credit scores. This lack of awareness often results in higher loan interest rates, sometimes by as much as 2-3%—a significant cost over time.

How Credit Inquiries Work?

Every time you apply for a loan, credit card, or even some rental agreements, a credit check happens. Lenders want to assess your financial health before approving your request. But did you know not all credit checks are the same? Some impact your credit score, while others don’t. This difference, though subtle, can influence your future borrowing capacity.

The Impact of Hard Inquiries on Your Credit Score  

Take the case of Aditya, a 29-year-old professional from Mumbai. Excited about a premium credit card offering exclusive travel benefits, he applied for multiple cards within a short span. What he didn’t realize was that each application triggered a hard inquiry, slightly lowering his credit score. A month later, when he applied for a car loan, the bank offered him a higher interest rate than expected. His multiple credit inquiries had signaled risk to lenders.

Hard inquiries, like the ones on Aditya’s report, occur when you actively apply for credit. Banks and financial institutions check your creditworthiness before approving your application. In India, credit bureaus like CIBIL, Experian, and Equifax keep track of these inquiries. A single hard inquiry may lower your score by a few points, and multiple inquiries in a short period can raise red flags. A study by PaisaBazaar found that borrowers with more than six hard inquiries in a year had an 18% higher chance of being rejected for new credit lines.

Soft Inquiries: Checking Your Score Without Harm

On the other hand, there are soft inquiries. Ever checked your own credit score through a fintech app? That’s a soft inquiry—one that has no impact on your credit score. Banks also conduct soft inquiries when they send pre-approved credit card or loan offers. Employers sometimes check credit reports before hiring for high-trust positions. These inquiries don’t indicate active borrowing and hence don’t affect your credit standing.

Stay Ahead of the Curve: Smart Credit Inquiry Strategies

So, what’s the takeaway? If you’re planning to apply for a loan or a new credit card, be mindful of how frequently you do it. Instead of applying for multiple options blindly, compare rates within a short timeframe—CIBIL treats multiple inquiries for the same type of loan as a single inquiry if done within 14 days. This strategy helps you find the best deal without unnecessary damage to your score.

In India, where credit penetration is growing but financial literacy remains a challenge, being aware of these nuances is crucial. A 2023 RBI report stated that India has over 220 million active credit users, yet a staggering 68% lack basic credit score knowledge (Source).

Monitoring your credit report through platforms like CIBIL, Experian, or free services from banks can help you stay informed and avoid surprises when you actually need credit.

At the end of the day, managing credit inquiries smartly is about understanding how lenders view your financial behavior. Avoid excessive applications, space them out wisely, and keep track of your credit health. The more aware you are, the better your chances of securing favorable loan terms when you need them the most. A little vigilance today can save you from financial headaches tomorrow. (Learn more on Investopedia).