Bank Pulling Your Credit Report? Wait, Don’t Freak Out

Unless you seek to borrow funds from your friends or relatives or from a lender who is not a part of the mainstream organized financial structure you cannot circumvent an inquiry into your credit score. Thus whenever an applicant applies for a loan or a new credit card the prospective lender will seek the applicants credit report to assess their credit health and then based on that they will decide whether to accept the application or not. Credit check is not only a part of the screening process used by lenders when assessing potential candidates but it is the first step in that process. So the borrower or an applicant can do nothing about a financial institution seeking their CIR when applying for credit. However is this a cause of worry?

Impact of a Bank Pulling Your Credit Report:

Banks or any other lender seeking the applicant’s report is part of the screening process and is beneficial to both the lender and borrower. Lenders can eliminate applicants who pose a threat of default as may be revealed by their credit score and for the borrower it means a more objective process of screening which is not based on subjective factors. So what happens when a bank pulls the CIR of an individual?

A credit report consists of various sections and each section has information related to that aspect respectively. There is a personal information section which will have details about name, contact details and so on for the person; the accounts details section will have details about home loans, personal loans, auto loans, all credit cards that a person may have and so on while the inquiries section will have details about the inquiries that have been made about the credit score of the individual. Thus which financial institution sought the report of the applicant and when will be recorded in this section.  There are five aspects that are taken into account when the credit score is calculated. Inquiries information is one of the five factors and each inquiry can cause the credit score to fall.

So is there a Cause of Worry?

Despite hard inquiries causing a dip in the credit score there is no reason to worry about it when a bank seeks the CIR. This is due to a couple of reasons; the first reason being that each hard enquiry will cause a dip of only five points or so in the score. The actual impact will depend on some other aspects also; if there are few accounts and the credit history is not very deep then the impact of each hard inquiry will be slightly higher. When there are a larger number of accounts and the credit history is deeper then each inquiry will have a comparatively lesser impact on credit score.

Though hard inquiries are taken into account when calculating the score but their weightage is only 10% thus their actual impact is very less when compared to other aspects like repayment history and credit utilization ratio. Thus if one has been responsible in paying their dues on time in the past and has also been a responsible credit card user their overall score is expected to be good. If there are missed payments, high credit utilization ratio and too many unsecured loans in the credit report then there is not much that can be done. In such a scenario a bank pulling your report will just worsen the score slightly.

So unless one makes reckless applications for loans there should not be a cause of worry.  When calculating the score only inquiries that were made in the past two years are considered which should reduce the stress level for any applicant.

When applying for a loan the applicant should ensure that they check the eligibility criteria of the lender so that they are sure of their application being accepted. Also stay away from applying for a loan or fresh credit unless absolutely necessary, this will save you from unnecessary hard inquiries and any impact on the credit rating.

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Know why your loan applications are getting rejected

There has been a whooping increase in the Non-performing assets (bad loans) of the banks in the past couple of years. Hence they have become extra cautious while disbursing loans to the borrowers. They follow a rigorous process of evaluating the applicant. Several factors like the age, income, job stability and CIBIL score are considered to judge the ability of the borrower to repay the loan back. Even the slightest doubt about your creditworthiness may lead to a prompt rejection of the loan application.

 

If your loan application is rejected, it may be a serious blow to your financial plans, especially when you do not have alternatives to finance your immediate requirements of cash. But rather than dwelling on this unfortunate outcome it is better to find out reasons that have led to the denial. Try to pinpoint the cause of rejection and work on that area. A little effort can help improve your financial picture and make you eligible for a loan approval in the future.

 

Here are some most common reasons why your loan application might get rejected.

 

Poor credit history

 

All banks and financial institutions look at your CIBIL Score and CIBIL report to analyse the risk associated with approving your application. A low CIBIL score is a warning sign to the lenders that you may not be worthy of lending money. Most banks have a cut-off score, below which they out rightly reject the applications. Apart from the CIBIL score they also see the remarks on the CIBIL report. Foreclosure, bankruptcy and court judgements show you as a high risk borrower. Even defaults on previous loans, skipped EMI’s, late payments or pending credit card bills are strong reasons of rejection. Make sure you build an impressive credit history before you apply for a loan.

 

Too many borrowings

 

If you have taken too many loans in the past you are seen as a credit hungry individual who is overly dependent on borrowings. Irrespective of whether you were able to honour your debts or not banks maintain a distance from such high risk profiles. They feel that an over leveraged person may not be able to bear the burden of additional EMI payments. Even a high income figure does not give them enough assurance that you will not default in the future.

 

Inadequate income

 

Your income is the key factor that influences a bank’s lending decision. Banks check your income to debt ratio to understand whether you will be able to honour the monthly repayment of loans. Adequately document all the sources of income and attach the tax returns of past couple of years to support as a proof.

 

Unstable job

 

Banks also place a lot of importance on the stability of your job. If you have switched several jobs in the past year, or if your job is temporary, banks may not be assured of a regular stream of income and you may not get an approval. Some banks even require you to be employed in a particular company for at least three years in order to be eligible for a loan. Banks even check the financial health of the company in which you are employed to assess your job security.

 

Previous rejections

If your loan application got rejected in the past it shows up on the CIBIL report. This greatly reduces the chances of future loan approvals. If you are denied loan once it is not wise to keep applying for loans unless you have worked upon the reason of rejection. Each time you do so, banks make an enquiry of your CIBIL score, which causes a further dip in the score. If you know that bad credit history is the reason for rejection, then you should work towards improving your CIBIL score and wait for at least six months before making a fresh application.

Insufficient credit information

Your CIBIL score depends upon how well you have serviced your loan obligations. But if you never took any loans before, you will not have any records in the CIBIL report to prove that you are a dependable borrower. In this case you will not have a CIBIL score. Since banks have no way of judging your repayment behaviour chances of rejecting the application are high. You can start building your credit history by taking secured credit cards. Use them to make monthly purchases and pay of the bills on time. Timely payments on the credit cards will get recorded on the CIBIL report and help build your CIBIL rating.

If your loan application gets rejected the first thing you should do is to check your CIBIL score and get a copy of your CIBIL report. Analyse it and create a plan to improve your credit history. Get your finances back on track so that you are confident when you submit your next loan application. If the reasons for denial are not associated with the CIBIL report then make sure you work on them before submitting another loan application, otherwise a series of rejections will hurt your CIBIL score. All it needs is a little patience and commitment and you can ensure things to move in your favour.