Maintaining a strong credit report is essential for a stable financial planning journey. A credit report acts like a financial report card, summarising your borrowing history and repayment behaviour.
Through this report, lenders understand how responsibly you manage debt over time. Based on this data, a credit score is generated that reflects your creditworthiness. Banks, credit card companies, and other lenders use this score to decide whether to approve loans and at what interest rate.
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A higher score usually means better financial credibility and easier access to credit. Typically, a credit score of over 800 is considered very good and allows borrowers to get financial products such as loans at attractive rates.
Before opting for a loan, you may decide to get familiar with your latest credit score. But that may not always be a wise option. This is because it is very important to first understand the type of credit inquiries that can impact your score.
Usually, there are two types of credit inquiries: soft and hard. A soft inquiry does not affect your credit score, while a hard inquiry, usually done by lenders, can slightly reduce it.
5 Things To Understand About Soft And Hard Credit Checks:
1. Soft credit checks are simple reviews of your credit history. They do not show any intent to borrow money. These are used for background or informational purposes only. As a result, a soft inquiry does not affect your credit score.
2. Typically, only you can see soft inquiries on your credit report, and lenders do not consider them when making decisions. For example, when you check your own credit report, a soft inquiry is recorded. This type of check is considered harmless.
3. Hard credit checks happen when you apply for a new loan, credit card, or other form of credit. In this case, the lender reviews your credit report to understand your repayment history. They check whether you have paid past dues on time or missed payments before approving credit.
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4. Unlike soft inquiries, hard inquiries can slightly reduce your credit score for a temporary period. They are also visible to other lenders and can remain on your credit report for up to two years.
5. This is why experts usually advise against applying for many loans or credit cards within a short time. Such behaviour can reflect financial distress and may push lenders away. Even if you end up getting a loan, the lending rate may not be as favourable, which can have long-term implications for your fiscal health.
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