Imagine that your child is down with fever, and you have to take care of him. How will you know he is getting better or not? Why, you will obviously take his temperature from time to time, for that is the best way to monitor his health, right? Now imagine that you have to monitor your creditworthiness. How will you go about it? By checking your credit score periodically, of course! But is checking your report frequently is always a good idea? Well, it depends. Keep reading to know more.
First things first. What is credit really? Everyone has their own definition of it. Some think credit means their credit report, others think credit refers to their credit score, or credit rating. Both are different, but both are equally important.
Credit Score: Your credit score, for instance CIBIL score, is a three digit score that determines your creditworthiness. It is based on your credit history, payments for loans and credit cards, history of defaulting etc. Even though there are multiple credit information bureaus in India, CIBIL, and thus CIBIL score is the one that is generally preferred by banks and other financial institutions.
Credit Report: Your credit report contains detailed information of your credit usage. In it you can find the details of all your accounts, such as loans and credit cards, etc, status of loans, pending debt, personal information, remarks (if provided by lending institutions, etc.), and the credit score itself.
Technically, applying for credit report should not have any effect on anything, but this is not so. Enquiries on your credit report does have a negative impact on it. It depends on who is making the enquiries, and how many times the enquiry is made.
Applying for a credit report is commonly referred to as making an enquiry, and it can be of two kinds:
Soft Enquiry- When you apply for your credit report yourself to CIBIL then it is called a soft enquiry. You can do so for checking your score, and for finding errors or mistakes in it. This kind of enquiry is not detrimental to your score.
Hard Enquiry- When a bank, or some financial institution requests for your credit report to a credit information bureau such as CIBIL then it is called a hard enquiry, and it could cause damage to your score. Generally banks make such enquiries when you apply for home loans or credit cards. The more frequent are such enquiries the more is the damage.
To protect your CIBIL score you must do every possible thing to limit hard enquiries. This is because every single hard enquiry can have a bad effect on your report and score. You can however, make as many soft enquiries you want, but ideally you should do so in the following cases:
· Loans: When you wish to apply for a loan then it is a good idea to check your credit report first. You can improve credit score, before you actually submit a loan application for low cibil score. This is also helpful because you won't have to apply for the loan in multiple banks, which means there will be limited hard enquiries.
· Verification: If you have requested for the removal of discrepancies from your report recently then you can apply for your credit report after 15 days to verify that the changes have taken place.
· Keeping Track: Your credit report can be of great help when you want to control your expenses, and ensure that the loan payments are made in time. This is because your report carries the information of your payment history which can help you see where you are going wrong or right, and adjust your expenses accordingly.
Ideally, you should check your CIBIL report every six months or so. If you want to be extra careful there is no harm in lowering the time to 2-3 months. Any lower than that is not necessary, because a lender typically submits new information on you to CIBIL on a monthly basis, which is further processed by the authority.
Whether you go for a 6 month approach or the 2-3 months approach for checking your CIBIL report, if you are choosing any of them you can easily control your score, and detect potential problems before it is too late.