Does Getting a Preapproval Hurt Your Credit?

Getting a preapproval generally does not negatively affect your credit score. Preapproval serves as a preliminary assessment of your creditworthiness by a lender for a specific loan or credit product. This process helps you understand your potential borrowing capacity and what loan amounts and terms you might qualify for. It provides a clearer financial picture for future large purchases or investments.

Understanding Credit Inquiries

When a lender or another entity reviews your credit information, it results in a credit inquiry. These are categorized into two main types: soft inquiries and hard inquiries. A soft inquiry, also known as a soft pull, occurs when your credit report is accessed for informational purposes. This can happen when you check your own credit score or when a company pre-screens you for an unsolicited offer of credit. Soft inquiries do not impact your credit score.

In contrast, a hard inquiry, or hard pull, occurs when you formally apply for new credit, such as a credit card, mortgage, or auto loan. Hard inquiries can cause a small, temporary dip in your credit score, usually by a few points. While hard inquiries remain on your credit report for up to two years, their impact on your credit score usually lessens or disappears after about 12 months.

What Preapproval Entails

Most preapproval processes, particularly for credit cards and personal loans, involve a soft inquiry. This preliminary check allows lenders to assess your financial standing without negatively impacting your credit score. A soft inquiry is sufficient because preapproval is not a final loan commitment but rather an indication of what you might qualify for.

It is important to distinguish preapproval from a full loan application. A formal application will almost always result in a hard inquiry, as the lender needs to conduct a thorough review of your credit history to make a final lending decision. While some preapprovals for larger loans like mortgages or auto loans might involve a hard inquiry, many lenders utilize soft inquiries for this initial step. The primary benefit of preapproval is gaining clarity on your purchasing power, which can streamline the shopping process for significant purchases.

When a Credit Check Might Affect Your Score

A credit check primarily affects your score when it is a hard inquiry, triggered by applying for new lines of credit like a credit card, mortgage, or auto loan. A single hard inquiry results in a minimal and temporary decrease of a few points, often less than five, on your credit score. The effect is usually short-lived, with scores often recovering within a few months through responsible credit management.

Multiple hard inquiries for different types of credit in a short period can have a more noticeable impact on your credit score. This might suggest a higher credit risk to lenders. However, credit scoring models often account for “rate shopping” for specific types of loans. For instance, multiple hard inquiries for a mortgage, auto loan, or student loan within a defined shopping period, usually between 14 and 45 days, are treated as a single inquiry. This allows consumers to compare interest rates and terms from various lenders without undue negative impact on their credit score.

Managing Your Credit Score

Maintaining a healthy credit score involves consistent and responsible financial habits. Paying your bills on time every month is important, as payment history significantly influences your credit score. Setting up automatic payments can help ensure timely remittances and avoid missed due dates.

Another important factor is keeping your credit utilization low, ideally below 30% of your available credit. For example, if you have a credit card with a $10,000 limit, strive to keep your balance below $3,000. Regularly checking your credit reports for accuracy, which you can do for free once a year through authorized channels, helps identify and correct any potential errors.