Can applying for a loan bring my credit score down?

11-Jan-2019 written by : FSI-Team

Can applying for a loan bring my credit score down?

We all know that loans are an integral part of our lives and also that the performance on any credit product would impact the credit score. However, one may not even remotely have the idea that even a loan application can impact the score. If you actually check out on your bureau report you would find that the score has dipped by a few points post you applied for the loan.

The same happens because any new trade line would be viewed as potential risk on the repayment of the existing and new loans. So even if the loan application does not materialize and gets rejected there would be a dip by a few points.

What has your loan application to do with the credit scores?

The lending institutions assess and related the risk associated with the borrower through the credit scores. Say you apply for a HDFC home loan, the underwriting process would first check on your scores before the loan application even being reviewed by an underwriter. There could be two outcomes if the loan passes through the first check and reached the underwriting desk. First, the loan may get approved or may get rejected.

If the application is rejected, the underwriter may have found your new loan to be potentially risky. Irrespective of reason of rejection, it get construed as a peril and would result in scrapping off a few points from the score.

In the event the loan application gets approved, it would add to the exposure that you would have and would again impact the credit score.

Hard Inquiries

Every time a lender runs an inquiry on bureau it gets captured on the bureau. Frequent inquiries by the lending institutions also have a negative impact on the score. There are many people who go for interest shopping and in the quest to get best possible rates, apply with multiple lenders. Their endeavor only hurts the credibility. It is always better to find out the rate of interest through other mediums rather than applying for the loans.

How is score calculated?

The score is an outcome of complex algorithms and statistics. And the stats that the bureaus consider can be divided into five major factors. Each new loan impact the following factors:

  • Payment history
  • Amount owed
  • New Credit

The payment history carries a weightage of 35% and is the largest factor. With each new trade line, since the payment pattern is yet to unveil, it would have some impact on the score. While this will be only temporary and the score will build again as the EMI on the loans gets paid over months, but the fact is that a drop is bound to happen.

Amount owed is the total exposure that you would have against all the banks put together. Now with a new loan this figure will have a substantial jump. Owing to this change again the number will see a downward trend.

Any new credit that gets added carries a 10% weightage and this new loan will impact the scores.

Do check your scores on regular intervals

Now that the free CIBIL score is available just through a few clicks and in minutes, you should not have the inhibition to check it. Do note that your score will not get impacted in any ways even if you obtain it every single day of the year. This is called a soft inquiry and does not become part of the bureau data that gets analyzed.



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