You cannot ignore the importance of a credit score, especially, while seeking a loan. This is because a good credit score is a prerequisite to getting a loan at affordable interest rates. Banks and financial organizations usually refrain from lending out to people with poor credit scores or charge higher interest rates.
Credit score mirrors the creditworthiness of any inclined borrower. This means that a higher credit score translates to higher creditworthiness of a person. Loan applicants with a higher credit score are likely to get a loan at lower interest rates and favourable terms and conditions.
Many people intending to borrow money for whatever reasons say a home loan, vehicle loan, business loan or personal loan, are shocked and often complain how their credit scores go for a toss when checked frequently. This is strange because many people are aware of the negative consequences of frequently verifying credit scores to determine loan eligibility.
How is credit score affected?
There are two ways in which you may check your credit score. One way is that you fill in your financial details on the sites of various lenders, credit card companies, banks, etc. and check for customer credit score ratings before issuing a credit card or pre-approving a loan. These are called soft inquiries as this is one way to find out the credit score without incurring any kind of debt.
However, if you have applied for credit and the potential lending company seeks your credit reports, your credit score inquiry will turn out to be a hard inquiry. The lender will seek more information to gauge your credit report. This nature of hard inquiry can adversely affect your credit score. This is because whenever someone applies for a loan or credit card, debt companies look at them as a sign of credit hungriness. The person’s credit score is looked at with more interest if he or she has sought a loan already. Inquiries without corresponding loans sought or taken are referred to as “soft inquiries”.
Reducing impact on credit score
Seeking a loan implies a willingness to repay the amount in the long run. You should not go shopping for a loan as you shop for clothes. Incessant inquiries for loans will damage your credit score. Instead, decide how much loan you would like to take and at what interest rate. Then zero down all possible loan options before applying on the lender’s site for the loan amount.
It always makes sense to plan your finances and then decide from whom to seek the loan. This will make you look less credit hungry, thus, lessening the impact on your credit score and shielding it from possible damage.