Does Getting Rejected Affect Credit Score?
Applying for credit takes at least a bit of work—you may need to gather income documents or fill out a paper or online application. And you probably have some hopes resting on this process, such as getting a new vehicle or a new credit card. So, disappointment is understandable if the answer from the bank turns out to be no.
It’s important for consumers to know they don’t need to fear the no, however, when it comes to their credit report. Here’s what you need to know about whether a credit rejection impacts your score.
Does Your Credit Score Go Down When You Get Declined?
The short answer is no, your credit score is not impacted directly by whether a lender agrees to extend you credit or not. And that’s a good thing because whether or not a lender approves you doesn’t even necessarily mean you’re more or less worthy of credit in general. You might get declined for another reason, such as you didn’t submit the right documents in a timely manner.
So, if you’re asking the question “Does getting rejected for a loan hurt credit?” remember that the credit agencies don’t know what the outcome of the application was. They only know you have a line of credit once you establish it and the lender reports the account. If you get declined, that information is completely irrelevant to your credit report and history.
How Much Does Loan Rejection Affect Credit Rating?
Given the information above, you can see that getting rejected for a loan doesn’t, in and of itself, impact your credit rating at all. However, the actions you take following that rejection can impact your credit score. Specifically, if you continue to seek loans you don’t have the credit history to get, you can rack up numerous hard inquiries, and those can lower your credit score.
Here’s how it works. You apply for a loan, and the bank in question conducts a hard inquiry. That causes a slight drop in your credit score. If you’re rejected for that loan and immediately try to get another one, the process is repeated. According to Experian, you lose between five and 10 points from your credit score with each new hard inquiry.
If you apply for five to 10 different loans in a short period of time, you could lose between 25 and 100 points. That means you could drop from fair credit to poor credit quickly, reducing your chances of receiving a loan in the near future even more. So while a rejection doesn’t cost you any points, your actions after a rejection can ruin your good credit score.
Note that there is one exception to this rule. When you’re shopping for a specific type of loan, such as an auto loan or home mortgage, the credit bureaus treat multiple inquiries within a short amount of time as a single query. That means you don’t get hit with numerous drops to your score, letting you work with brokers or bankers to find the right loan or deal.
What Should You Do After Getting Rejected for Credit?
Instead of going directly to another loan product, take time to understand why you were declined for this loan or credit card. Follow some steps after getting rejected for credit, such as reading the rejection letter from the lender or credit card issuer, getting information about your credit score and fixing any issues that could be dragging your credit score down.
The goal should be to apply for credit confidently because you know you have the rating for approval. You can only do that when you do your homework and keep track of your credit rating.
Why Is My Credit Score Going Down?
In some cases, you may be surprised when you apply for credit that you aren’t approved. You might suddenly wonder what’s happened to your credit score. Remember that your score did not go down because you were declined. However, it could be lower than you think because of fraud or errors.
Mistakes on your credit report or fraud can be stressful to deal with, but you have options for disputing these issues. It’s a good idea to do that before you start another loan application.
Getting Approved for Credit After a Rejection
The bottom line is that blindly applying for credit is definitely a bad idea. If you’re rejected, work with services such as Credit.com to find out more about your credit scores and where you stand.
Once you do the research, you can decide. You might work to fix your credit so you can apply for a different type of loan. You might realize your credit score was not what caused you to be declined and fix another type of issue, such as your documentation.
Or, you might realize you don’t qualify for this particular loan or credit card and apply for one you do qualify for so you can work on developing a more positive credit history. Ultimately, the decision is up to you, but it’s a good idea to stay informed so you can take actions that drive your credit rating up rather than down.