Does Pre-Qualification Affect Your Credit Score?

Many individuals considering a new loan or credit product often ask if pre-qualification will impact their credit score. Pre-qualification serves as an initial assessment by a lender to determine potential eligibility for a loan or credit product. This article aims to clarify the relationship between pre-qualification and your credit score.

Understanding Pre-Qualification

Pre-qualification is a preliminary step where a lender provides an estimate of what loan amount or credit limit an individual might qualify for, based on self-reported financial information like income and existing debts. It offers a general idea of borrowing capacity without committing either the applicant or the lender. Lenders commonly use pre-qualification for various products, including mortgages, auto loans, and credit cards. It serves as a useful tool for consumers to understand their financial standing and potential borrowing power before submitting a formal application. This initial assessment helps individuals gauge affordability and explore options without a deep dive into their financial history.

Soft Inquiries and Credit Scores

Pre-qualification typically involves a “soft inquiry,” also known as a soft pull, on a credit report. A soft inquiry occurs when a person or company checks a credit report for informational purposes, not in response to a formal credit application. These checks are generally not visible to other lenders and do not affect a credit score.

Examples of soft inquiries include checking your own credit score, receiving pre-approved credit card offers in the mail, or certain background checks. Soft inquiries do not impact credit scores because they are not indicative of new credit-seeking behavior. They are used for review or promotional purposes, and credit scoring models do not penalize them.

When Hard Inquiries Occur

A “hard inquiry,” or hard pull, is a different type of credit check that occurs when an individual formally applies for new credit. This includes applications for mortgages, auto loans, credit cards, or personal loans. Unlike soft inquiries, hard inquiries can cause a slight, temporary dip in a credit score.

The impact of a hard inquiry is usually minor, often a reduction of fewer than five points, and temporary. Hard inquiries typically remain on a credit report for up to two years, though their effect on credit scores usually diminishes after 12 months. This impact occurs because seeking new credit can signal increased risk to lenders, especially if multiple applications are made within a short timeframe.

For certain loans, such as mortgages or auto loans, multiple hard inquiries made within a concentrated period are often treated as a single inquiry by credit scoring models. This allows consumers to “rate shop” for the best terms without incurring multiple negative impacts on their score. This shopping period can range from 14 to 45 days, depending on the credit scoring model used.