Does Pre-Qualification Check Credit & Affect Your Score?
Understand how initial loan eligibility checks affect your credit score. Learn the critical distinctions between inquiry types and their impact.
Pre-qualification is an initial, informal assessment of eligibility for various loan or credit products. It provides an estimate of what a borrower might receive, helping individuals understand their potential borrowing capacity without committing to a full application. This step guides whether pursuing a specific credit product is a realistic option.
Credit Check for Pre-Qualification
Pre-qualification involves a credit check, typically a “soft inquiry.” This type of inquiry allows a lender to review limited credit information to gauge a borrower’s creditworthiness. Soft inquiries are generally not visible to other lenders on a credit report and do not impact an individual’s credit score.
Lenders use soft inquiries for pre-qualification to understand an applicant’s financial health. This helps them determine if a borrower meets lending criteria without requiring a formal application. It provides an efficient way to offer an estimate of potential terms, streamlining the initial stages of exploring credit options.
Implications for Your Credit Score
A soft inquiry, commonly used for pre-qualification, has no impact on an individual’s credit score. This is because soft inquiries are not associated with a specific application for new credit, unlike more formal credit checks.
In contrast, a “hard inquiry” occurs when a lender assesses credit for a formal loan application. Hard inquiries can cause a small, temporary dip in a credit score, usually by a few points. While hard inquiries remain on a credit report for up to two years, their effect on a score typically diminishes after a few months.
The benefit of pre-qualification is its ability to allow consumers to explore their eligibility without risking a negative impact on their credit score. This provides an opportunity to understand potential loan amounts and terms. It enables informed decision-making before committing to a process that could temporarily alter their credit standing.
Understanding Pre-Approval
Pre-approval signifies a more thorough evaluation of a borrower’s financial profile compared to pre-qualification. This process often involves a “hard inquiry” into an individual’s credit history, which can temporarily affect their credit score. Lenders conduct a hard inquiry for pre-approval because it represents a more serious step towards securing a loan.
This in-depth review requires borrowers to provide comprehensive financial documentation, such as income tax returns, pay stubs, and bank statements. The lender verifies these details to confirm the borrower’s financial capacity and creditworthiness. Pre-approval offers a more concrete indication of the loan amount and terms a borrower might receive, bringing them closer to a final loan offer.