Does Prequalification Affect Your Credit Score?
Does prequalification affect your credit score? Get clear answers on how initial credit checks differ from full applications and their impact.
Individuals considering new loans or credit cards often encounter “prequalification” and question its impact on their credit score. Understanding the difference between prequalification and a full credit application is important. This article clarifies what prequalification involves and how it relates to credit scores.
Understanding Prequalification
Prequalification represents an initial, informal assessment by a lender to gauge a borrower’s potential eligibility for a credit product. During this process, lenders request basic financial information from the consumer, such as reported income, employment status, and an estimate of existing financial obligations. This allows them to determine if an individual meets preliminary lending criteria without a comprehensive review of their financial history.
This preliminary check involves a “soft inquiry” on a credit report. A soft inquiry occurs when a person or company checks a credit report for informational purposes, not for a lending decision. These inquiries do not appear to other lenders and do not typically impact a credit score. Prequalification provides an indication of potential eligibility, but it does not guarantee approval for credit or a specific interest rate.
What a Full Credit Application Involves
A full credit application differs significantly from prequalification, representing a formal request for credit. When submitting a full application, individuals provide more extensive personal and financial details, often including supporting documentation like pay stubs, tax returns, or bank statements for verification. Lenders use this detailed information to make a definitive decision regarding credit approval and the specific terms of the offer.
This comprehensive review process involves a “hard inquiry.” A hard inquiry occurs when a lender formally requests a full credit report from one or more credit bureaus to evaluate a borrower’s creditworthiness. This type of inquiry is a standard component of the final approval process for various credit products, including mortgages, auto loans, and new credit cards.
How Credit Inquiries Affect Your Score
The distinction between soft and hard inquiries is crucial for their impact on a credit score. Soft inquiries are often used by lenders for pre-screened offers or when an individual checks their own credit report, and they remain invisible to other lenders. Consequently, pursuing prequalification multiple times for different credit products will not negatively impact one’s credit standing.
Hard inquiries can cause a slight, temporary dip in a credit score. When a lender performs a hard inquiry, it signals that an individual is actively seeking new credit, which credit scoring models interpret as a potential increase in credit risk. This inquiry is recorded on the credit report and typically remains visible to other lenders for up to two years, though its impact on the credit score diminishes after a few months. The score reduction is usually minor, often ranging from a few points to about ten points, and its severity depends on factors such as the individual’s overall credit history and the number of recent inquiries. For instance, multiple inquiries for the same type of loan within a focused shopping period are often treated as a single inquiry to mitigate the negative impact on the score.