Does Being Declined Hurt Your Credit Score?
Understand how credit applications affect your score, why denials happen, and practical steps to take for future financial health.
A credit application denial itself does not directly impact your credit score. Instead, it is the associated credit check, known as a “hard inquiry,” that can cause a minor and typically temporary dip in your credit score.
The Impact of a Hard Inquiry
A hard inquiry occurs when a lender or creditor reviews your credit report in response to a formal application for new credit, such as a credit card, mortgage, or auto loan. This action is recorded on your credit report and indicates to other potential lenders that you are seeking additional credit. Hard inquiries can cause a small, temporary reduction in your credit score, typically by a few points.
Hard inquiries generally remain on your credit report for up to two years. However, their impact on your credit score typically diminishes after about one year. This temporary nature means that with responsible credit behavior, your score can recover fairly quickly. It is important to distinguish hard inquiries from “soft inquiries,” which occur when you check your own credit, or when a pre-qualification offer is generated; soft inquiries do not affect your credit score.
For certain types of credit, such as mortgages, auto loans, or student loans, multiple hard inquiries within a short period are often treated as a single inquiry. This “rate shopping” window, which can range from 14 to 45 days depending on the credit scoring model, allows consumers to compare offers without multiple score impacts. This exception generally does not apply to credit card applications, where each inquiry typically affects your score.
Common Reasons for Denial
Lenders deny credit applications based on a comprehensive review of an applicant’s credit profile and other financial details. The underlying reasons for the denial often reflect factors that already negatively influence your creditworthiness. Understanding these reasons is a crucial step toward improving your financial standing.
One common reason for denial is a low credit score, which indicates to lenders a higher risk of default. Another frequent issue is high credit utilization, which refers to using a large percentage of your available credit, often above 30%. A short credit history or an insufficient mix of credit accounts can also lead to denial, as lenders may lack enough information to assess your repayment behavior.
Other factors contributing to denial include having too many recent hard inquiries, which can suggest a high need for credit, or a high debt-to-income ratio, indicating difficulty managing additional debt. Past negative events, such as recent delinquencies, charge-offs, or bankruptcies, significantly impact creditworthiness. Finally, errors on a credit report can also lead to an unfair denial, making it important to review your reports regularly.
Actions After a Decline
If your credit application is declined, your first step should be to request an adverse action notice from the lender. This notice, which lenders are legally required to provide within 30 days of the denial, will explain the specific reasons for the rejection. Understanding these reasons is essential for identifying areas that require improvement in your credit profile.
Next, obtain and review your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. You are entitled to a free copy of your credit report from each bureau annually through AnnualCreditReport.com. Carefully examine these reports for any inaccuracies or outdated information that might have contributed to the denial, as errors can negatively impact your score. Should you find errors, you can dispute them directly with the credit bureau and the information provider.
Beyond addressing errors, focus on strategies to improve your creditworthiness, such as consistently paying all bills on time, as payment history is a significant factor in credit scoring. Reducing credit card balances to lower your credit utilization ratio (ideally below 30%) can also significantly boost your score. Consider options like secured credit cards or credit-builder loans to establish a positive payment history if you have limited credit. Finally, avoid applying for new credit frequently to allow your credit score to recover from any hard inquiries.