Does Pre-Approval Hurt Your Credit Score?
Get clarity on pre-approvals and your credit score. Understand the different types of credit checks and their actual impact.
Many individuals wonder if simply checking their eligibility for a credit product, known as pre-approval, could negatively impact their credit score. Understanding the nuances of credit inquiries is important for making informed financial decisions. This article will clarify the relationship between pre-approvals and your credit score, distinguishing between different types of credit checks and their effects.
Understanding Credit Inquiries
When a lender or another entity reviews your credit information, it results in a credit inquiry. These inquiries fall into two main categories: soft inquiries and hard inquiries, each with a distinct effect on your credit score.
Soft inquiries, also known as soft pulls or soft credit checks, occur when someone checks your credit report. Examples include checking your own credit score, or receiving pre-approved credit offers. These inquiries are typically not visible to lenders and do not impact your credit score.
Hard inquiries, often called hard pulls or hard credit checks, happen when you formally apply for new credit, such as a loan or a new credit card. These inquiries require your explicit permission. A hard inquiry can cause a temporary, small dip in your credit score by a few points, and remains on your credit report for up to two years, though its impact on your score fades within a few months to a year.
How Pre-Approvals Work
Pre-approval serves as an initial assessment by a lender to gauge your potential eligibility for a credit product like a loan or credit card. During this process, lenders review certain aspects of your financial profile and creditworthiness to provide an estimate of what you might qualify for. This preliminary check helps you understand your borrowing capacity without committing to a full application.
The pre-approval process typically involves a soft inquiry into your credit report. This means the lender conducts a preliminary review of your credit history without triggering a hard inquiry that could affect your credit score. Because soft inquiries do not indicate that you are actively seeking new credit, they do not appear to other lenders and therefore have no negative impact on your credit score. This allows consumers to shop around and compare potential offers with greater confidence.
Distinguishing Pre-Approval from Full Application
The distinction between a pre-approval and a full credit application is important for understanding the potential impact on your credit score. A pre-approval is a conditional offer based on a preliminary review, often using a soft inquiry, which generally does not affect your score. This step provides an estimate of what you might qualify for, allowing you to evaluate options without immediate consequences to your credit.
Once you decide to move forward with a specific offer, submitting a formal application for a loan or credit card triggers a hard inquiry. This occurs because the lender needs to conduct a thorough review of your entire credit report to make a final lending decision. Hard inquiries are recorded on your credit report and can temporarily reduce your credit score by a small number of points, usually fewer than five to ten points. While the inquiry remains on your report for up to two years, its effect on your score typically diminishes significantly after about 12 months.
Monitoring Your Credit
Regularly monitoring your credit is a proactive step in managing your financial health and understanding how inquiries impact your profile. Checking your credit reports allows you to review all listed inquiries, both soft and hard, and identify any discrepancies. This practice helps ensure the accuracy of your financial information and can alert you to potential fraudulent activity.
You can obtain a free copy of your credit report once every 12 months from each of the three major nationwide credit reporting companies: Equifax, Experian, and TransUnion. The official website authorized by federal law for this purpose is AnnualCreditReport.com. Beyond annual checks, many banks, credit card companies, and other financial platforms offer free credit monitoring services. These services often provide alerts for significant changes to your credit report, including new accounts or hard inquiries, helping you stay informed about your credit status.