Does Getting Denied for a Credit Card Hurt Your Credit Score?
Discover the nuanced relationship between credit card applications, denials, and your credit score, plus steps for improvement.
Credit scores play a significant role in an individual’s financial life. These numerical summaries reflect a person’s creditworthiness, influencing access to loans, credit cards, and even rental agreements. Credit scores are dynamic, changing based on various financial behaviors and decisions. Many individuals seek credit cards as a tool for managing finances or building credit history.
The Application’s Impact on Your Credit Score
When applying for a new credit card, lenders typically perform a “hard inquiry” on the credit report. A hard inquiry (also known as a “hard pull” or “hard credit check”) occurs when a lender checks a consumer’s credit history for a lending decision. This action is recorded on the credit report and can lead to a slight, temporary decrease in a credit score.
The score reduction from a single hard inquiry is small, often just a few points. It remains on a credit report for up to two years, though its impact diminishes after a few months. The denial itself does not directly harm a credit score.
The impact comes from the preceding hard inquiry. Applying for multiple credit cards in a short period can result in several hard inquiries, which may have a more noticeable effect. Multiple inquiries can signal to lenders that an individual might be taking on too much debt or experiencing financial difficulties.
Common Reasons for Credit Card Denial
Lenders evaluate various factors when considering a credit card application, and denial can stem from several common reasons. A low credit score is a primary factor, indicating a higher risk of default. A high existing debt burden is another frequent reason, where current obligations are too extensive relative to income.
Limited or short credit history can also lead to denial, as lenders lack sufficient data to assess repayment behavior. Too many recent credit applications, even if approved, can be a red flag, suggesting an excessive need for credit. Errors on a credit report, such as incorrect late payments or fraudulent accounts, can also lead to denial. Lenders also consider income and employment stability to ensure repayment capacity.
Steps After a Credit Card Denial
After a credit card denial, review the adverse action notice, also known as a denial letter. Federal law requires lenders to provide specific reasons in this letter, which is crucial for addressing underlying issues.
Next, obtain and review credit reports from Experian, Equifax, and TransUnion. You are entitled to a free copy from each bureau annually. These reports can help identify inaccuracies or outdated information that contributed to the denial. If errors are found, dispute them directly with the credit bureau, providing supporting documentation.
Contact the lender directly if the denial reason is unclear or if clarification is needed. Once reasons for denial are understood and report errors addressed, wait several months to a year before submitting another application. This waiting period allows time to improve creditworthiness and for the previous hard inquiry’s impact to diminish.
Strategies for Credit Improvement
Improving a credit profile involves consistent and responsible financial habits. Consistently paying all bills on time is a fundamental strategy, as payment history is a significant factor. Maintaining low credit utilization (amount of credit used vs. total available) also contributes positively. Keep credit card balances well below their limits, ideally under 30%.
Avoid unnecessary new credit applications to prevent multiple hard inquiries. This demonstrates financial stability to potential lenders. Maintain a responsible mix of credit types, such as installment loans and revolving credit, as credit history matures. Keeping older credit accounts open and active, even if not frequently used, contributes to a longer credit history.