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When you apply for a loan, the lender typically checks one or more of your credit reports and credit scores. When a lender accesses your credit report, a so-called hard inquiry is added to your reports.
If your loan application is denied, the inquiry will remain, but the lender's decision will not appear on your credit reports. So, a declined loan will not appear on your credit report and won't directly impact your scores.
Does Being Declined for a Loan Affect Your Credit?
While the inquiry related to your denied application will appear on your credit reports, the credit bureaus (Experian, TransUnion and Equifax) don't receive information on whether or not your credit applications are approved.
In addition to personal identifying information, your credit report includes account balances, credit limits, loan amounts and payment histories as well as two types of inquiries—hard and soft.
Soft inquiries show up when you view your own credit report or a lender with whom you already do business checks your credit report as part of an account review. You may also see a soft inquiry appear as a result of a lender sending you a preapproved offer, or your credit being checked for an apartment or job application. Soft inquiries do not affect credit scores.
Hard inquiries are related to credit applications you have made. They may affect your credit, although a dip related to a hard inquiry is temporary and usually small.
Both hard and soft inquiries stay on your credit reports for two years.
How Does a Hard Inquiry Affect Your Credit?
A hard inquiry contains two critical pieces of information: the date of the inquiry and the name of the inquiring company.
The scoring models used by VantageScore® and FICO consider hard inquiries in their calculations and may ding your scores as a result. If your credit scores are affected, the impact of an individual inquiry is typically minimal.
However, it's a good idea to avoid multiple inquiries in a short time unless you are shopping for a specific type of credit, such as an auto loan. (More on that below.) You can also use a service such as Experian's card comparison tool to ensure you're applying for cards you're likely to qualify for.
Shopping for loans for major purchases can be OK, though. The impact of multiple hard inquiries is minimized if they're conducted in a short time from the same types of installment lenders. These inquiries are typically counted as one inquiry in most credit score calculations as long as they occur within a short timeframe, often two weeks.
Do FICO and VantageScore Consider Hard Inquiries Differently?
Of all the factors in both FICO and VantageScore credit scoring systems, credit inquiries play one of the smallest roles. For example, the FICO® Score☉ model counts inquiries as just one part of a category worth no more than 10% of your score. In VantageScore's credit scoring models, they make up a similarly small portion of your score.
What to Do if Your Loan Application Is Denied
If you do apply for a loan or credit card and the lender denies your application, they are required to send you a denial letter called an adverse action notice.
This letter will typically state why you were declined. If you were declined due to your credit score or the information included in your credit report, the letter should provide a list of the reasons, or risk factors, that contributed to the decision.
If a credit report was used in the lending decision, the letter must identify the source of the credit report information used and an explanation of your rights. If your credit score was a factor in denial, the letter will include it as well as the date it was calculated and the range of possible scores.
The first step you should take after you've been denied credit is to get a copy of your credit report. Examine it to see what may have impacted your loan denial and work to improve your credit or, if you find inaccurate information, you have the right to file a dispute.
You can also check your credit score based on Experian data. Your credit scores are influenced only by the information on your credit report. The factors that impact your scores the most include your payment history, your credit card debt and how long you have been using credit.
How to Avoid Being Declined for a Loan
If your loan application was denied because of poor credit, then you should consider some of the many ways to improve your credit before you reapply. Keep in mind that there are many paths to a higher credit score, so your credit improvement strategy is going to be unique to your situation.
The most important thing you can do is pay on time. If you are having financial trouble and worry you may miss a payment, reach out to your lender as soon as possible to see if they can offer any relief options that can help you avoid credit harm.
If excessive credit card debt is contributing to your lower scores, then your strategy should be to begin aggressively paying it down. This might mean forgoing purchases and redirecting the money toward paying off your debt or looking for ways to increase your income.
The amount you owe (as well as your credit utilization rate) is an important factor in both credit scoring models, and reducing your debt balances can help you make progress toward higher scores.
The Bottom Line
Getting denied for a loan or credit card will not be recorded on your credit report, and it will not directly impact your credit scores.
To improve the chances that you'll be approved for credit, you may want to take a look at your credit before you apply, and take steps to improve it if you need to.
Another way to potentially improve your score is to have your phone and utility accounts added to your Experian credit report using the free Experian Boost®ø feature. Experian Boost adds on-time payment history for accounts that otherwise wouldn't show up on your credit report, and may improve your scores instantly.