Does Getting Denied a Credit Increase Hurt Your Score?

Consumers often wonder if requesting a credit limit increase, particularly if denied, negatively impacts their credit score. This article explains how credit scores function in relation to credit applications and their outcomes.

Understanding Credit Score Fundamentals

A credit score is a numerical representation of an individual’s creditworthiness, helping lenders assess the risk associated with extending credit. This three-digit number is derived from information within a credit report, and while there is no single universal formula, common models like FICO consider several key factors. Payment history is the most significant component, typically accounting for about 35% of a score, reflecting whether bills are paid on time and consistently.

Amounts owed, often referred to as credit utilization, constitutes approximately 30% of the score. This factor measures the total debt an individual carries compared to their available credit. Maintaining a low credit utilization ratio, generally below 30% of available credit, is often viewed favorably by lenders.

The length of credit history contributes around 15% to a credit score, considering the age of all accounts. New credit, including recent applications and newly opened accounts, makes up about 10% of the score. The credit mix, representing different types of accounts like credit cards and installment loans, accounts for the remaining 10%.

The Role of Credit Inquiries

When a consumer applies for new credit, including a credit limit increase, a lender typically performs a credit check. This check can be either a “hard inquiry” or a “soft inquiry.” A hard inquiry occurs when a lender requests a full credit report from one of the three major credit bureaus—Equifax, Experian, or TransUnion—to make a lending decision. This type of inquiry is recorded on a credit report and can cause a small, temporary dip in a credit score, usually by a few points.

Hard inquiries remain on a credit report for up to two years, though their impact on a credit score diminishes within one year. Multiple hard inquiries in a short period, especially for credit cards, can signal increased risk to lenders. For certain loans like mortgages or auto loans, multiple inquiries within 14 to 45 days are treated as a single inquiry to allow for rate shopping.

In contrast, a soft inquiry does not affect a credit score. These inquiries occur when an individual checks their own credit score, or when a lender pre-screens an individual for a credit offer without a formal application. Some credit card issuers may use a soft inquiry for credit limit increase requests, meaning no score impact.

Impact of a Denied Credit Increase

A denied credit increase request does not, by itself, directly harm a credit score. The denial outcome is not reported to credit bureaus as a negative event. Any potential impact on a credit score comes solely from the hard inquiry that may have occurred when the credit limit increase was requested.

If a hard inquiry was performed, the small, temporary score reduction would have happened regardless of whether the request was approved or denied. The act of applying for credit, which leads to the inquiry, is what can influence the score, not the lender’s decision itself. Therefore, a denial does not add a separate, negative mark to a credit report or score beyond the inquiry.

Reasons for Credit Increase Denials

Lenders consider various factors when evaluating a request for a credit limit increase, and a denial can stem from multiple reasons unrelated to the inquiry itself. One common reason is high existing credit utilization across all accounts, which can indicate that an individual is already heavily indebted. A history of recent missed payments or late payments on any credit account is also a significant red flag for lenders.

Lenders consider various factors when evaluating a credit limit increase request. Common reasons for denial include:

• Too many recent credit applications or newly opened accounts.
• Insufficient income to support a higher credit limit.
• A short credit history with the current lender.
• Infrequent use of the existing account.

Next Steps After a Denial

Upon receiving a denial for a credit increase, consumers are entitled to an adverse action notice from the lender. This notice, required by law, explains the specific reason or reasons for the denial. It typically includes information about the credit bureau whose report was used in the decision and informs the consumer of their right to obtain a free copy of that specific credit report within a certain timeframe, usually 60 days.

Reviewing this adverse action notice is an important step to understand the underlying issues that led to the denial. Consumers should then obtain a free copy of their credit report from each of the three major credit bureaus by visiting AnnualCreditReport.com. Checking the report for accuracy and disputing any errors or outdated information can help in addressing the reasons for denial.