13-Sep-2017 written by : FSI-Team
As discussion around credit scores and their importance increases a lot of awareness is being generated among borrowers or potential borrowers about their importance and use. However still a lot of misconceptions and half-baked information does confuse and often mislead people. Thus it is important that correct information about what impacts the score calculation and what does not impact it be available to all users of credit.
Let us consider the above question that was posed by one of our readers. One of our readers sent us a query which was "Inquiries Dropped My Score 104 Points, How"
The short answer to that question is that inquiries cannot drop credit score by 100 odd points. Let us get clarity about a few aspects to understand this discussion better.
When an individual applies for a loan from a bank or for a fresh credit card the prospective lender or the card company will like to ascertain the credibility of the applicant before accepting their application. For this they will seek the CIR (Credit Information of the Report) of the applicant, all enquiries about the credit score are listed in the CIR and our termed as hard enquiries.
When an individual seeks to check his/her own score in a bid to be credit healthy or for any reason it is termed as a soft enquiry. Soft inquiries are not reported in the CIR; hence do not impact one's score calculation. On the contrary it is advisable that everyone check their credit score once in a while to assess their credit health, spot any errors that may have been reported and work on improving the score if required. One can access free CIBIL score online too if desired and assess their credit health.
Inquiries are amongst the five factors that are taken into account when calculating the credit score. So each time you apply for fresh credit and the financial institute seeks your CIR you can expect a mention of it on your CIR. However having said that this aspect has only a 10% weightage in score so its impact is not as great as other factors like repayment history and credit utilization which have a bearing of 35% and 30%respectively on score calculation. Thus the impact of this aspect is much lesser than compared to some other aspects; however the impact inquires have on the final score will also be determined by how many accounts an individual has.
If there are multiple accounts, with a deep history then the impact will be lesser when compared to a CIR where there are only a couple of accounts with recent history. Each enquiry can lower the score by 5 points or something close and only enquiries that have been made in the last two years are taken into account when calculating the score. So while inquiries can result in a low CIBIL score, they cannot lower the score by 100 points. Thus our suggestion to the reader would be to look for other reasons that may have caused the score to dip so much.
So we come to the next question if not inquiries what else can lower the score by 100 points. There may be a lot of reasons for the rating dropping; it could be one reason or more than one acting at the same time. Some of them could be, the borrower missing a payment, guaranteeing a loan, over use of credit card leading to a high credit utilization ratio, settling a debt and so on. Thus it is required that the reader seek his/her CIR, go through it in detail and then identify the cause that has led to a drop in your score.
Hopefully we have helped dispel some myths. In case you have any queries please send them to us and we can help you understand your CIR better.