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Understanding the Impact of Loan Denials on Your Credit

When you apply for a loan, lenders typically check your credit reports and scores. This process results in a hard inquiry on your credit report. If your loan application is denied, the inquiry remains, but the lender’s decision does not appear on your credit reports. Therefore, a declined loan will not directly impact your credit 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) do not receive information on whether your credit applications are approved. Your credit report includes account balances, credit limits, loan amounts, payment histories, and two types of inquiries—hard and soft.

Soft inquiries occur 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. They may also 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 the impact is usually temporary and 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 slightly lower your scores. However, the impact of an individual inquiry is typically minimal.

It’s advisable to avoid multiple inquiries in a short time unless you are shopping for a specific type of credit, such as an auto loan. The impact of multiple hard inquiries is minimized if they are 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 if they occur within a short timeframe, often two weeks.

Do FICO and VantageScore Consider Hard Inquiries Differently?

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 your loan or credit card application is denied, the lender is required to send you a denial letter called an adverse action notice. This letter will typically state why you were declined. If your credit score or the information in your credit report was a factor, the letter should provide a list of the reasons that contributed to the decision.

The first step after being 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. If you find inaccurate information, you have the right to file a dispute. You can also check your credit score based on Experian data. 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 due to poor credit, consider ways to improve your credit before reapplying. 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 to see if they can offer any relief options.

If excessive credit card debt is contributing to your lower scores, 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. 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 of being approved for credit, review your credit before you apply and take steps to improve it if needed. 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® 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.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate the mortgage process with confidence and ease.

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