Curb your desire to apply for too many loans to maintain a high credit score

Did you enquire about a fresh personal loan this week? And did you happen to apply for a credit card last week itself? If that's the case, you should curb your desire to apply for too many loans.

Applying for a large number of loans (or credit cards) in a short span of time can adversely impact your credit score. This happens because it leads to hard inquiries on your credit report.

Here's a brief description of different reasons for which it is recommended to restrict your loan applications to a high credit score unless it is essential.

Reasons to avoid applying for too many loans

I. Hard inquiries directly impact your score: Every time you apply for a loan, the bank carries out a hard inquiry (which is also referred to as a hard pull) to review your full credit report. A single hard inquiry brings down your score. Multiple hard inquiries in a short period of time can compound this damage, thus bringing your score by 10–20 points or more.

II. New credit is a key factor: Almost all credit information companies (CICs), including CIBIL, CRIF High Mark, consider new credit as a key determinant of credit score. Too many recent inquiries indicate a higher risk to lenders. They worry that you are looking for the debt which you can't service.

III. Inquiries stay visible for a long time: When you apply for a loan, it stays visible on your credit report for a long time.

IV. The ripple effect: A lower score from inquiries can push you into a poor credit score bracket, eventually raising interest rates on loans you borrow. This can turn out to be quite expensive for you.

Meanwhile, one could enquire about different loans within a short period in order to secure the best rate of interest. When you do so, it is considered as one inquiry and not multiple. But these inquiries should relate to one category of loan only. 

Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.