Insights

Think before you apply for a loan

August 28, 2014 . FundsIndia Desk

This article is a contribution towards our financial literacy series. It has been written by a specialist in credit and debt counseling – Satish Mehta, Founder and Director of www.credexpert.in.

03loan3When you want to avail a loan, you apply to various lending institutions, don’t you? Also, it is a common practice to apply to more than one lending institution to analyze and select the best loan that offers the lowest interest rate. Do you think multiple loan applications are helpful to you?

An instant answer to this is of yes. But remember, as you are waiting to get your best option, all your loan applications are tracked by the credit bureau. Each time you make a loan application, the lending institution obtains your credit report to judge your credit worthiness. This is reflected on your report as an ‘Enquiry.’

Let us understand how these enquiries impact you?

– Firstly, 10% of your credit score is calculated based on your enquiries. Hence, it has the potential to bring your credit score down.
– Secondly, a high number of enquiries indicates a “credit hungry” behaviour. This is viewed negatively by lending institutions.
– Thirdly, these enquiries would reflect on your credit report for a minimum of 7 years!

So what is the solution to avoid a high number of enquiries? In this age of technology, there are various loan comparison platforms which would help you compare the terms offered by various lending institutions. You can filter your choice and then apply to the one that suits your need. Whilst each time a lending institution obtains your credit report it is reported as an enquiry, there is no harm if you check your own credit report. Instead, it is vital to monitor your credit report frequently (i.e., at least twice a year) to avoid identity theft and keep a check on your score.

Also, if you have obtained your credit report and have found an enquiry which is not the result of an application made by you, then you should raise a dispute with the credit bureau. Having a credit report which is true and factual to your credit history is always advisable. The trick is to apply selectively and wisely.

ABOUT THE AUTHOR

Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.

6 thoughts on “Think before you apply for a loan

  1. That’s nice article , Thanks Satish for throwing light on Credit Report related education. What you said is right- everyone should check their own credit report before applying for any loan and every two year.

    It would be great if you can post some more article on ‘How one should calculate credit score on it’s own and is it really possible ?” and also how using multiple credit cards can affect one’s credit score or what’s all factors that affect credit score.

    1. Dear Saurabh,
      Thank you for your remarks. Calculation of the credit score is based on a complex and complicated algorithm. Some of the factors that affect your credit score are:
      – Your payment history: Defaults and late payments will have a negative impact.
      – Credit Mix: You need to maintain a balance between secured and unsecured credit. Inclination towards unsecured credit will affect your credit score negatively.
      – Credit Utilization: The credit utilization ratio of 40-50% as against the available credit limit is considered good.
      – No. of Enquiries: Too many enquires in your credit report will reduce your score as it will reflect credit hungry behaviour.
      – Status: Any credit account Written Off / Settled will severely impact your credit score as it shows your inability to service a credit account.
      If you want a quick and rough idea of what your score could be, please visit this link to our website – http://www.credexpert.in/credit-score-calculator/
      Thanks!

  2. That’s nice article , Thanks Satish for throwing light on Credit Report related education. What you said is right- everyone should check their own credit report before applying for any loan and every two year.

    It would be great if you can post some more article on ‘How one should calculate credit score on it’s own and is it really possible ?” and also how using multiple credit cards can affect one’s credit score or what’s all factors that affect credit score.

    1. Dear Saurabh,
      Thank you for your remarks. Calculation of the credit score is based on a complex and complicated algorithm. Some of the factors that affect your credit score are:
      – Your payment history: Defaults and late payments will have a negative impact.
      – Credit Mix: You need to maintain a balance between secured and unsecured credit. Inclination towards unsecured credit will affect your credit score negatively.
      – Credit Utilization: The credit utilization ratio of 40-50% as against the available credit limit is considered good.
      – No. of Enquiries: Too many enquires in your credit report will reduce your score as it will reflect credit hungry behaviour.
      – Status: Any credit account Written Off / Settled will severely impact your credit score as it shows your inability to service a credit account.
      If you want a quick and rough idea of what your score could be, please visit this link to our website – http://www.credexpert.in/credit-score-calculator/
      Thanks!

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