Does Getting Preapproved Hurt Your Credit Score?

Pre-approval serves as a preliminary assessment of creditworthiness, commonly used for significant loans such as mortgages or auto loans. This process provides an estimated borrowing capacity before an individual commits to a specific purchase.

Understanding Pre-Approval

Pre-approval is an important initial step where a lender evaluates a potential borrower’s financial standing. This assessment provides an estimate of the loan amount an applicant might qualify for, based on a review of financial details. Lenders collect information such as income, existing debts, and self-reported assets to gauge an applicant’s ability to repay a loan.

It is important to understand that pre-approval does not represent a final loan offer or a commitment from the lender to provide financing. Similarly, the applicant is not obligated to accept a loan from that specific lender after receiving pre-approval. This preliminary step helps set realistic expectations for borrowers, allowing them to focus their search within an appropriate price range for a home or vehicle.

Credit Inquiries and Your Score

Credit inquiries affect credit scores when seeking new credit. There are two primary types: soft inquiries and hard inquiries. A soft inquiry, also known as a soft pull, occurs when a person or company checks your credit as part of a background check or for pre-screened offers. These inquiries do not affect your credit score and may not be visible to other lenders on your credit report.

In contrast, a hard inquiry, or hard pull, occurs when a lender accesses your credit file with your explicit permission as part of a formal credit application. Examples include applying for a mortgage, an auto loan, or a new credit card. Hard inquiries are recorded on your credit report and can be seen by other lenders. While they can lower your credit score, the impact is usually minor and temporary.

The Credit Score Impact of Pre-Approval

Pre-approvals generally involve a soft inquiry, which does not negatively affect your credit score. This is because soft inquiries are for informational purposes, allowing lenders to assess creditworthiness without initiating a formal application for new credit. You might encounter soft inquiries when checking your own credit score, or when companies pre-screen you for promotional offers.

For larger loans, such as mortgages or auto loans, some pre-approvals might involve a hard inquiry. While a hard inquiry can cause a small, temporary dip in your credit score, its effect is minimal and short-lived. Many credit scoring models account for rate shopping for specific types of loans, like mortgages or auto loans, by treating multiple inquiries within a certain timeframe as a single inquiry. This approach allows consumers to compare offers without undue credit score penalties.

The benefits of obtaining a pre-approval, such as understanding your borrowing capacity and strengthening your position as a buyer, often outweigh any potential credit score effects. A pre-approval provides a clear financial roadmap, enabling more confident and informed decisions during the purchasing process.

Reviewing Your Credit Report

Reviewing your credit report is a proactive step after credit inquiries. You are entitled to a free credit report weekly from each of the three major nationwide credit reporting agencies: Equifax, Experian, and TransUnion. These can be accessed through AnnualCreditReport.com, the official, federally authorized source.

Once you obtain your report, navigate to the “inquiries” section to identify recent credit checks. Hard inquiries are clearly listed and visible to other lenders, typically remaining on your report for up to two years, though they usually impact your score for only one year. Soft inquiries may also appear on your report, but they are only visible to you and do not affect your credit score. Regularly reviewing this section helps you monitor your credit activity and ensures accuracy.