My Credit Score Dropped After Applying for a Loan – Why?

Noticing a dip in your credit score after applying for a loan can be unsettling. Especially if you've been diligent with your finances and have never missed a payment.

However, this is a temporary dip. It's a common occurrence when anyone applies for a loan. This blog will help you understand why it happens, along with what not to do to ensure that your credit score goes back to where it was earlier.

Why Your Credit Score Drops After a Loan Application

There are two reasons your credit score drops after a loan application -

1. Hard Inquiries

When you apply for a new loan, lenders generally perform what is called a "hard inquiry" to verify your creditworthiness. The credit bureau records this action, as it's a signal that you're taking on potential new debt.

If you apply for multiple loans simultaneously, especially in a short period of time. In that case, this drop will be a lot more significant, as each application will trigger an individual hard inquiry.

2. New Credit Accounts

Once a loan is approved, it becomes a fresh account on your credit profile. This lowers your average account age, i.e., the duration of how long you've managed credit so far.

Wondering if checking your credit score also has the same effect? Rest easy. When you check your credit score, it's known as a "soft inquiry," and this does not impact your score.

Also Read - The Role of AI in Enhancing Credit Scoring Models for Loan Approvals

How Long Does the Dip Last?

In most cases, this minor drop (in the event of a single loan application) recovers within three to six months. This period gives your credit profile time to absorb the hard inquiry and adjust to the new account.

But a lot depends on your actions within the same period. If you -

• Pay all your EMIs on time
• Keep your credit utilization ratio healthy (below 30%)

How to Minimise the Impact on Your Score When Applying for a Loan?

Now, it's clear that a temporary dip in your credit score is normal. But there are a few things that you can do to ensure that the impact stays small and remains temporary.

• Check your eligibility first - Before directly initiating a loan application, use a loan eligibility checker to verify if you qualify for a loan first. This way, you will avoid unnecessary hard inquiries against your credit report.
• Limit your applications- Avoid applying to multiple lenders all at once or within a very short period. Each application will trigger a hard inquiry and will portray you as a risky borrower. Research lenders before you apply to minimize the need to apply to several at a time.
• Stay on top of existing dues - Make sure that you pay all current EMIs and bills on time to cement your reputation as a reliable borrower.

Borrow Smart With Hero Fincorp

Now that you know that a small drop in your credit score does not spell trouble post a loan application, you can confidently apply for one. All you need to make sure of is that you borrow only what you need, repay all your EMIs on time, and keep your credit utilisation in check.

Ready to explore your options? Check out Hero FinCorp's Instant Personal Loans app. Apply online, get instant approval, and take care of your needs without the wait.

Frequently Asked Questions

1. Does my credit score drop if my loan application is rejected?

The drop in your credit score is due to a hard inquiry at the time of application. Whether your loan is rejected or approved, it has no impact on your credit score.

2. Do pre-approved loan offers affect my credit score?

No, pre-approved loans do not affect your credit score, as these offers are given based on soft inquiries. Your score is affected only if you proceed with the application and a hard inquiry is made.

3. Is there a limit to how many times I can apply for a loan in a year?

There is no limit to how many loans you can apply for in a year. But please remember that the credit bureaus will record each application.

4. Will applying for a higher loan amount impact my score more?

The impact comes from the inquiry itself, not the amount. That said, larger loans will influence lenders' perception of your repayment capacity, i.e, your debt-to-income ratio.