How Much Does a Preapproval Hurt Your Credit?

Many people wonder if seeking a pre-approval for financing, such as a mortgage or an auto loan, will negatively affect their credit standing. This article aims to clarify how pre-approvals typically influence credit scores.

Credit Inquiries and Your Score

When a lender requests information from your credit report, it results in a credit inquiry. These inquiries are categorized into two main types: soft inquiries and hard inquiries, which have different effects on your credit score.

A soft inquiry, also known as a soft pull, occurs when a credit check is performed without a formal application for new credit. Examples include checking your own credit score or when a lender pre-screens you for an offer. Soft inquiries do not impact your credit score and are not visible to other lenders.

Conversely, a hard inquiry, or hard pull, happens when you apply for new credit, such as a loan or credit card, and the lender requests your full credit report. A single hard inquiry typically causes a small, temporary reduction in your credit score, often by fewer than five points, though it can be up to 10 points. Hard inquiries generally remain on your credit report for up to two years, but their impact on your credit score usually diminishes after 12 months.

How Pre-Approval Affects Your Credit

The effect of a pre-approval on your credit score depends on the type of pre-approval and the lender’s process. For credit cards and personal loans, pre-approval processes often involve a soft inquiry, which does not impact your credit score. This allows you to gauge your likelihood of approval without immediate credit score implications.

However, pre-approvals for larger loans like mortgages or auto loans frequently involve a hard inquiry. While this can cause a slight, temporary dip in your score, credit scoring models account for “rate shopping” behavior. Multiple hard inquiries for the same type of loan (e.g., mortgage, auto, or student loan) within a specific timeframe are often treated as a single inquiry. This timeframe typically ranges from 14 to 45 days, allowing consumers to compare offers from various lenders without their score being penalized multiple times for the same shopping effort.

Other Influences on Your Credit Score

While inquiries are a factor, they represent a small portion of what determines your overall credit score. Credit scoring models, such as FICO and VantageScore, consider several weighted components to assess creditworthiness.

Payment history holds the most significant weight, typically accounting for about 35% of a FICO Score. The amount of debt owed, particularly credit utilization (the amount of credit used compared to available credit), is another major factor, usually making up around 30% of the score. Maintaining low credit utilization, ideally below 30% of your available credit, can positively influence this component.

The length of your credit history, which considers the age of your oldest and newest accounts and their average age, contributes approximately 15% to your score. New credit, including recent applications and newly opened accounts, accounts for about 10% of the score. Your credit mix, or the variety of credit accounts you manage (e.g., credit cards, installment loans), makes up the remaining 10%.

Pre-Approval, Pre-Qualification, and Full Application

The terms “pre-qualification” and “pre-approval” are often used interchangeably, but they represent different stages in the lending process with varying levels of lender commitment and credit inquiry impact. Pre-qualification is a preliminary step where a lender provides an estimate of how much you might be able to borrow based on self-reported financial information. This process typically involves a soft credit inquiry and offers a general idea of affordability.

Pre-approval, on the other hand, is a more thorough evaluation by a lender. It involves a deeper review of your financial standing, including verification of income, assets, and debts, and often requires a hard credit inquiry. If approved, the lender provides a conditional offer for a specific loan amount, which is a stronger indication of creditworthiness than a pre-qualification. This conditional approval is typically valid for a set period, often 60 to 90 days.

The full loan application is the final stage, occurring after pre-approval, where all documentation is submitted for underwriting and final approval. While pre-approval offers a strong indication of loan eligibility, it does not guarantee final approval, as the property or other specific loan details still need to be evaluated.