Does Getting Denied a Loan Hurt Your Credit Score?

A credit score summarizes an individual’s creditworthiness, helping lenders assess risk. Many worry that a loan denial negatively impacts their score. This article clarifies the relationship between loan applications, denials, and your credit score by explaining how credit scores are calculated and what truly influences them.

Understanding Credit Inquiries and Loan Applications

Applying for a loan or new credit typically results in a “hard inquiry” on your credit report. This signals to credit bureaus that you are seeking new credit and can cause a slight, temporary dip in your credit score, often by fewer than five points. Hard inquiries remain on your credit report for up to two years, though their impact usually diminishes after 12 months. The application itself, not the outcome, triggers this inquiry.

A loan denial itself does not directly appear on your credit report or affect your credit score. Credit reports document the inquiry, but not the approval or rejection. Applying for multiple loans within a short period can lead to several hard inquiries, signaling higher credit risk. However, credit scoring models often treat multiple inquiries for specific types of loans, like mortgages or auto loans, within a defined shopping period (e.g., 14 to 45 days) as a single inquiry.

Key Factors in Credit Score Calculation

Credit scores, such as FICO and VantageScore, are complex calculations based on several factors from your credit report. Payment history is a primary component, reflecting whether you consistently pay bills on time. Amounts owed, or credit utilization, also significantly influence your score, showing how much of your available credit you are using.

The length of your credit history, including the age of your oldest and newest accounts, contributes to your score by demonstrating experience managing credit. Your credit mix, including different types of accounts like credit cards and installment loans, also plays a role. New credit applications, represented by hard inquiries, are also considered. Lenders evaluate these factors to assess risk; a loan denial often stems from an unfavorable assessment of these components, not the denial itself causing a score reduction.

Reviewing Your Credit Information

After a loan application, especially if denied, review your credit reports. Federal law entitles you to a free copy of your credit report every 12 months from each of the three major nationwide credit bureaus: Equifax, Experian, and TransUnion. Access these reports at AnnualCreditReport.com, the only authorized website for free credit reports.

Your credit report contains personal identifying information, a detailed history of your credit accounts, including payment status and balances, and a record of credit inquiries. It also lists any public records, such as bankruptcies. Examining this information allows you to understand what lenders see when assessing your creditworthiness. Identifying and disputing any errors or inaccuracies on your report is important for maintaining healthy credit.