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Applying for a loan or credit card can affect your credit score, but if the lender denies your application, that decision won't have any bearing on your credit health. Here's what you need to know about how a credit application can impact your credit profile and the steps you can take after a denial.
Does Denied Credit Show Up on Your Credit Report?
No, denied credit applications won't appear on your credit report. Lenders don't report whether your applications were approved or denied because even approved applications don't necessarily result in a new account.
Generally, if you're approved for a credit card, the card issuer will open the account automatically. But if you apply and get approved for a handful of auto loans when shopping for a car, you'll only take one loan—usually the one with the best rate and terms.
Alternatively, you might apply for a personal loan or mortgage loan and then change your mind after reviewing the lender's offer. In either case, your application may not lead to a new account, even if you qualify for the loan.
Hard Inquiries Will Appear on Your Credit Report
While a loan denial won't show up on your credit report, hard inquiries will. A hard inquiry occurs when you submit a credit application and give the lender permission to check your credit.
Keep in mind, though, that lenders won't necessarily pull your credit report from all three credit bureaus (Experian, TransUnion and Equifax), so an inquiry might just affect one or two of your credit reports.
How Does a Hard Inquiry Affect Your Credit Score?
Hard inquiries remain on your credit report for two years, but they only impact your FICO® Score☉ for one year. The negative impact is generally small, though. According to FICO, each additional inquiry will reduce your credit score by fewer than five points.
However, they can have a greater impact if you have a large number of inquiries in a short period, or you have few credit accounts or a short credit history. If you're rate shopping for a loan, though, don't fret over the multiple inquiries. Here's how FICO and VantageScore® treat those:
- FICO: When rate shopping for an auto loan, student loan or mortgage loan, FICO will typically combine all inquiries made within a 14-day period (45 days for older FICO® Score versions) into one inquiry for scoring purposes. It also won't consider hard inquiries from these types of loan applications that occurred within the past 30 days.
- VantageScore: VantageScore uses a 14-day shopping window and slightly different rules. It combines hard inquiries on a wider range of account types, including credit cards and personal loans, but doesn't have the 30-day buffer period.
In some cases, a credit check could lead to a soft inquiry rather than a hard inquiry, and these never impact your credit scores. Soft inquiries can occur when someone checks your credit for a reason other than approving or denying a credit application, such as when you check your own reports or apply for a prequalification or preapproval.
What to Do After Being Rejected for Credit
Getting rejected is never fun, but you can take steps to improve your chances next time:
- Find out why your application was denied. When you are denied credit, the lender is required by law to send you an adverse action letter explaining why. It must also provide instructions on how you can receive a free copy of the credit report it used to make its decision. If the lender used your Experian credit report, you can request a free report at Experian's Report Access page.
- Address issues in the letter. Take action based on what you find in your adverse action notice. For example, if your credit card balances are too high, pay them down. If your income is too low, consider other income sources you can include or ask a loved one to cosign your application.
- Check your credit report. Check your credit report to get more information on the factors that might have impacted your application and take steps to improve your credit. If you find inaccurate information, you have the right to file a dispute with the credit bureaus.
- Apply with a different lender. If your credit is in good shape, you may still have a chance to get approved with favorable terms from another lender. Take some time to research alternatives, and look for opportunities to get prequalified with a soft inquiry to gauge your approval odds before submitting an official application.
- Wait and work on improving your credit. If your credit is considered fair or poor and your financial need isn't urgent, it's often best to wait until you've had time to improve your credit before applying again. While some creditors offer loans for people with bad or fair credit, the loans tend to have high interest rates and fees and may be best left as an emergency option.
Monitor Your Credit to Track Your Progress
With Experian's free credit monitoring service, you'll get access to your Experian credit report and FICO® Score, plus real-time alerts when changes are made to your report. With this information, you'll be able to track your progress and spot potential problems before they wreak havoc on your credit score.
