Does Prequalifying Affect Your Credit Score?

Prequalification serves as a preliminary step for consumers seeking to understand their eligibility for various credit products. This process allows individuals to gauge their potential for approval without committing to a full application.

Understanding Prequalification

Prequalification offers consumers a way to explore their options for credit products, such as loans or credit cards, before undergoing a complete application. It typically involves providing basic financial information to a potential lender. This allows the lender to conduct a high-level review of a consumer’s financial standing and offer an estimated approval likelihood or potential terms.

How Credit Inquiries Work

A credit inquiry occurs when a lender or other authorized entity requests to view a consumer’s credit report or score from a credit bureau. This action is a standard part of assessing an individual’s financial behavior and history. Lenders utilize credit inquiries to evaluate the risk associated with extending credit.

This process is a necessary step for any entity making credit-related decisions. When a request for credit information is made, it is recorded on the consumer’s credit report. This record indicates that a review of the credit file has taken place. The nature of this inquiry determines its impact on a consumer’s credit standing.

Soft vs. Hard Inquiries

Credit inquiries are categorized into two distinct types: soft inquiries and hard inquiries. Soft inquiries occur when an individual checks their own credit report or score, or when a lender pre-screens them for promotional offers, such as pre-approved credit card solicitations. These inquiries are not linked to a specific application for new credit and are often used for informational or marketing purposes. Soft inquiries are generally only visible to the consumer on their credit report and do not influence their credit score.

Hard inquiries, conversely, arise when a consumer formally applies for a new line of credit, which could include a mortgage, an auto loan, or a new credit card. These inquiries signify that a consumer is actively seeking new credit and require the consumer’s explicit permission. A hard inquiry involves a more thorough review of the credit file by the lender to make a definitive lending decision. Prequalification, notably, falls under the category of a soft inquiry.

The Impact on Your Credit Score

Prequalification, which typically involves a soft inquiry, does not affect a consumer’s credit score. This is because a soft inquiry is not considered an application for new credit by credit scoring models. Credit bureaus differentiate soft inquiries from hard inquiries, ensuring that checking one’s eligibility or receiving pre-screened offers does not negatively impact their credit standing. This allows consumers to explore various credit options without concern for their score.

Hard inquiries, however, can result in a small, temporary dip in a credit score. This minor reduction occurs because applying for new credit can signal increased credit-seeking behavior, which some scoring models interpret as a potential increase in risk. The impact of a single hard inquiry is usually minimal, and its effect on the score typically diminishes within a few months, although the inquiry itself may remain on a credit report for up to two years. Multiple hard inquiries within a short period, especially for different types of credit, can have a more pronounced effect.