Does Prequalification Affect Credit Score?

Many individuals wonder how different inquiries impact their credit standing. Applying for loans or credit cards involves reviewing personal financial history. Understanding how these reviews, particularly prequalification, interact with credit scores is a common concern. This article clarifies prequalification’s impact on credit scores, addressing a frequently misunderstood aspect of credit management.

Understanding Prequalification

Prequalification is an initial, informal assessment by a lender to gauge a consumer’s eligibility for a loan or credit product. It estimates how much a person might borrow and under what general terms, without requiring a full application. Prequalification helps consumers understand their borrowing capacity, aiding in budgeting or narrowing down options for a mortgage or car loan.

Lenders use prequalification to determine if a potential borrower meets basic lending criteria. This process involves the consumer providing self-reported information, such as income, employment details, monthly debts, and financial assets. A Social Security number may be requested for identity verification. This step does not guarantee a loan offer and is distinct from a full loan application.

The Two Types of Credit Inquiries

When a lender or other entity reviews an individual’s credit history, it falls into one of two categories: a soft inquiry or a hard inquiry. The distinction between these two types is important because they affect credit scores differently. Understanding their characteristics helps clarify how various financial activities appear on a credit report.

A soft inquiry, also known as a soft pull or soft check, occurs when a person or company checks credit as part of a background review, or when an individual checks their own credit score. These inquiries are associated with pre-approved offers for credit cards or loans, or when an employer conducts a background check. Soft inquiries may or may not be recorded on credit reports depending on the credit bureau, but they are generally only visible to the individual checking their own report.

Conversely, a hard inquiry, also known as a hard pull or hard check, occurs when an individual formally applies for new credit, such as a mortgage, auto loan, or credit card. Lenders perform a hard inquiry to assess creditworthiness before making a lending decision, and this type of inquiry requires the applicant’s authorization. Hard inquiries are recorded on credit reports and are visible to other lenders, indicating recent credit-seeking behavior.

How Prequalification Impacts Your Credit

Prequalification involves a soft inquiry, meaning it does not negatively affect an individual’s credit score. This is an advantage for consumers exploring financing options without risking a credit score drop. Lenders use soft inquiries for prequalification to estimate eligibility and potential terms, allowing consumers to gauge their standing without commitment.

A full credit application involves a hard inquiry, which can have a minor and temporary impact on a credit score. A single hard inquiry may cause a credit score to drop by fewer than five points, according to FICO, though this can vary. This impact lessens over a few months. Hard inquiries remain on a credit report for up to two years, though most credit-scoring models only consider them for about 12 months.

Multiple hard inquiries in a short timeframe, especially for different types of credit, can have a larger impact, signaling increased risk to lenders. However, for rate shopping for specific loans like mortgages or auto loans, multiple inquiries within a certain period (14 to 45 days) are counted as a single inquiry by credit scoring models.