Every time you apply for a loan, whether it’s a personal loan, car loan, home loan, gold loan, or a student loan, the banks will run an inquiry with the credit bureaus to know your credit score and report. But does applying for loans with multiple banks affect your credit score? The answer is, yes! Read below to know more about how applying for loans with multiple banks can affect your credit score.
What is a credit inquiry?
When you apply for a loan or a new credit card, the banks typically conduct a credit inquiry check. While the circumstances may differ from person to person, each inquiry will lower your credit score by a few points. There are two types of credit inquiries: a hard credit inquiry and a soft credit inquiry.
Hard credit inquiry: A hard inquiry involves the lender obtaining your credit report from agencies such as – CIBIL, Equifax, Experian, or TransUnion. Sometimes, hard inquiries can stay on your credit report for over two years.
Soft credit inquiry: On the other hand, soft credit inquiries are more routine. They can be triggered without your consent, and most of the time are not aligned with a loan application. A soft inquiry can be made in cases such as when you get preapproved credit offers or your credit card issuer increases your credit limit. Soft credit inquiries don’t affect your credit score.
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How loan application affects your credit score
People apply for loans for everything from consolidating credit card debt, paying off hefty medical bills to financing home renovation, etc. Like all financial information, your loan applications are also factored into your credit score and appear on your credit report. Getting a loan might even increase your credit score, even though the initial loan application will lower your credit score temporarily. When you make timely EMI payments to the lender, the loan can help you to build a good credit report. Having a variety of loans and credit cards can actually help you boost your credit score.
The only case when a loan may negatively affect your credit score is when you miss EMI payments, since payment history is one of the main factors in determining your credit score. And though paying off debt is a good financial decision, you might see a slight drop in your credit score once you pay your loan in full.
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How loan application in multiple banks can affect your credit score
When you apply for a loan in multiple banks to compare the interest rates and loan terms to determine which option suits you better, it results in too many hard inquiries by the lenders. However, the good part is that interest rate shopping will affect your credit score temporarily. Your credit score will improve within a short window of time, typically 14 to 45 days. However, applying for different types of loans, outside of this short period could be a red flag to the lender. Therefore, it is better for you to do all your interest rate-shopping within 3 weeks to play it safe and minimize the effect of too many hard credit inquiries.
