Having your credit card application or loan application rejected doesn’t harm your credit scores directly. However, lenders might look at your credit report when you apply, and the resulting hard inquiry could hurt your credit history slightly.
The credit agencies don’t know what the outcome of the loan application was. They only know you have a credit line once you create it and the lender reports the account. If you get declined, that is entirely irrelevant to your credit report and history.
How Much Does a Loan Rejection Affect my Rating?
You can see that having a loan application rejected doesn’t, in and of itself, affect your credit rating at all, considering the information above. However, Whatever you do after that rejection can affect your credit score. If you continue to apply for loans that you don’t have the credit score to get, you can accumulate several hard inquiries, Lowering your credit score.
Here’s the Way It Works
You apply for a loan, and the bank makes a hard inquiry. That causes your credit score to drop slightly. If that loan is rejected and you immediately apply for another one, you’ll repeat the process. According to experts at one of the Big-3 reporting firms, you lose between 5 and 10 points from your credit score with every new hard inquiry.
If you apply for 5 to 10 loans in a short period, you will lose between 25 and 100 points. That means you would drop from fair credit to poor credit fast, sabotaging your chances of receiving a loan shortly even more. So, your behavior immediately following a rejection can destroy your good credit score.
There Is One Exception
There is one exception to this rule you should know. When you’re looking for a specific sort of loan, such as a home improvement loan or home mortgage, multiple inquiries within a short amount of time are treated by the credit bureaus as one inquiry. That means you don’t get punished on your score.
What to Do After Your Credit Application Is Declined
Rejection is never pleasant, but you can do things to avoid denials and improve your odds, like find out why lenders declined your application. It may be because of many factors, like your credit score, credit history, and others.
When lenders deny you credit, they are required to give you an adverse action letter telling why. It provides instructions about how you can get a free copy of the credit report.
You may want to try to apply for a loan or credit card from a different source. If you continue to encounter obstacles, you might want to consider improving your credit and paying off debt. While some creditors offer loans to people with bad credit, the loans usually have high-interest rates and fees and might best be saved as an emergency option.
Does Declined Credit Show up on Your Credit Report?
Your credit report doesn’t note whether your applications were accepted or declined. However, it could show hard inquiries—records of creditors reviewing your credit reports to make lending decisions.
You may apply and get accepted for a handful of auto loans when shopping for a car, but you’ll only take the loan with the best terms. You might apply for a loan and then change your mind after reading the lender’s offer details. In either case, the hard inquiries didn’t lead to credit even though you were approved.
These inquiries will only appear on the credit report the lender examined. Creditors might check your credit reports from more than one of the major credit bureaus (Experian, TransUnion, and Equifax). If the creditor only looks at your Experian credit report, the event would be noted on your Experian report but not your Equifax or TransUnion credit reports.
How Does a Hard Inquiry Impact Your Credit?
Hard inquiries stay on your credit report for two years and could have a small impact on your credit scores. The effect often declines over time and usually lasts only a few months. You might experience larger score drops if your credit history is new or you have many hard inquiries over a short period.
So, Shop Around!
While every new application you submit might result in another hard inquiry, you can search for multiple lenders’ loans to try to get the best deal. Recognizing that this is smart rather than risky behavior, credit scoring models usually consider numerous hard inquiries as a single inquiry if they are for the same sort of loan and happen within a specific rate-shopping window.
For example, FICO will “un-duplicate” (or treat as one inquiry) student loan, auto loan, and mortgage hard inquiries that happen in a 14- to 45-day window (depending on the type of FICO® Score). FICO® Scores also won’t consider inquiries from these kinds of loan applications that occurred within the last month.
VantageScore®, another credit scoring company, uses a 14-day shopping window and somewhat different policies. It deduplicates hard inquiries on a more extensive spread of account kinds, including credit cards and personal loans, but doesn’t have the 30 days.
Also, know that a credit check might lead to a soft inquiry instead of a hard inquiry, and these never affect your credit scores. Soft inquiries can happen when someone checks your credit for another reason besides accepting or declining a credit application, like when you check your reports or apply for a prequalification or preapproval.
Why is your Credit Score Going Down?
If you monitor your credit score often or sign up for credit score alerts, you see how your credit score can change over time. You might be thrilled about an increase in your credit score and be equally alarmed about a decline.
The credit score calculation is very complicated, and it can be hard to determine the precise reason for a credit score drop. Since your credit score depends on your credit report, a surprise decrease in your score can typically happen from the information in your credit report changing. It doesn’t have to be a drastic change for your credit score to fall. There are some plausible reasons your credit score could drop.
1-Your Payment Was 30 or more Days Late
Payment history has the most crucial effect on your credit report. Loan and Credit card payments more than 30 days past due are reported to the credit bureaus and appear on your credit score. Once lenders record the late payment in your credit report, your credit score will most likely suffer.
2-You Made an Expensive Purchase
Another important influence on your credit score is the amount of available credit or your credit utilization ratio. It is shocking to many people, but if you make a large purchase on your credit card one month, you might see a credit score drop even if you pay the balance in full on time.
This is because credit card issuers usually report the credit card balance indicated on the last day of the billing cycle. The balance on your credit card statement is sometimes that which appears on your credit report.
It’s easy to correct the impact of a high balance. Just pay down the balance promptly, don’t make any more credit card purchases, and wait for the updated results to show on your credit report. This will help you recover the lost credit score points.
3- Lenders Sent Your Unpaid Account to Collection.
It’s critical to pay all your account to protect your credit, not only your credit cards and loans. If you fall behind on your non-credit accounts payments (like your monthly phone bill), the balance defaulted could be sent to a collection agency and reported on your credit report. Once a collection appears on your credit report, it will indeed cause a drop in your credit score.
4-Your Last Collection Dropped Off Your Credit Report
When calculating credit scores, credit scoring models put people in different categories, often called scorecards. Your credit profile is compared to other people on your scorecard to determine your credit score. While you may be at the top of a scorecard with the collection on your credit report, you may fall to the bottom of another scorecard if any adverse information is deleted from your credit report.
This type of credit score drop isn’t under your control. Luckily, if you continue paying your bills on time and continue to keep your debt low, your credit score will improve.
5-You Made a New Application for Credit
As we have previously discussed, an inquiry is recorded on your credit report any time you make a new credit application. Because inquiries amount to 10 percent of your credit score, applying for new credit will affect your credit score.
Even though inquiries remain on your credit report for two years, the bureaus only calculate them into your credit score for one year. After only a single inquiry, your credit score will gradually increase and rebound within 12 months if you have no other credit mishaps.
6-One of Your Credit Limits Was Lowered
A lower credit limit has the same effect as charging an expensive item. If you balance a credit card with a low credit limit, your credit utilization goes up, and your credit score declines. You don’t have control of your credit card issuer reducing your credit limit, but if this happens, paying down your balance can improve your credit.
7- A Credit Card Was Cancelled, or You Closed a Credit Card out
Closing a credit card can adversely affect your credit score, especially if the card has more available credit than your other credit cards. Credit card issuers can also cancel your credit card, which will have an impact on your credit—not because it was the creditor that closed the account, but simply because the account was closed.
8-Your Bankruptcy Fell off Your Credit Report
When bankruptcy disappears from your report after seven years (ten years for Chapter 7 bankruptcy), you’ll probably have a new credit scorecard, like what happens when a collection no longer affects your credit score. You might see a decline in your credit score because lenders compare your credit performance is to people who haven’t filed bankruptcy.
You Can Find a Credit Card Without Impacting Your Credit
If you’ve been rejected, understand that hard inquiries have only a minor impact on credit scores usually and the rejection won’t appear in your credit reports. To avoid additional hard inquiries and denials, start with lenders that offer preapprovals or pre-qualifications without a hard inquiry during your next set of applications.