Credit Repair

How Being Denied Credit Affects Your Credit Scores

There’s good news and bad news about being denied credit. The bad news, of course, is that your low credit score may be preventing you from borrowing. The good news is that the denial itself won’t make your credit score any worse. Rather, when you apply for new credit, it’s the credit inquiry that can potentially harm your score.

A denial of credit has no effect on your credit score. What can hurt your score is the hard credit inquiry required as part of your application for new credit. By the time you get a denial, no further damage from the process should occur.

The average consumer should see a drop of fewer than five points in his or her FICO® Score with one new hard inquiry, according to MyFICO®. However, inquiries may make the score drop more if you have a small number of accounts or a short credit history.

We’ll explain in this post how hard credit inquiries can affect your score.

Hard vs. soft credit inquiries

One aspect of a credit denial that might affect your score is the type of inquiry a lender has made into your credit history. Any time lenders consider doing business with you, they are likely to check your credit. However, not all inquiries are the same. There are both “hard” and “soft” inquiries. Hard credit inquiries can ding your credit, while soft inquiries won’t. Let’s look at the difference.

  • Hard credit inquiries: A hard inquiry occurs when you apply for credit and the lender looks up your credit report and score from one of the credit bureaus. This is part of how the lender decides whether to extend you credit. Such inquiries are considered “hard” and may affect your credit score.
  • Soft credit inquiries: A soft inquiry is done outside of a credit application process, such as when you are checking your own credit report or when lenders look at your score to see if they can preapprove you for credit offers. Such inquiries do not affect your credit score.

Too many inquiries can be a red flag

Keep in mind that many hard inquiries in a short period can be a red flag for lenders. They are likely to assume you are adding several new accounts, which could affect your ability to repay or put you at risk of overspending. Hard inquiries stay on your report for two years, though your score may only reflect inquiries from the last year. If you are working to improve your credit score, avoid hard inquiries where possible.

The one exception to this rule is when you are rate shopping. If you are looking for the best deal for a given loan, such as a mortgage, your credit report may receive multiple inquiries rapidly as you compare offers. As long as it falls within a set timeframe, credit reporting agencies treat this series as a single inquiry; it won’t affect your credit score as much as the same number of unrelated hard inquiries.

The length of a typical shopping period as defined by FICO varies depending on which version of the scoring formula is being used. The newest version of the formula uses 45 days as the time span in which multiple inquiries for the same type of loan are considered a single inquiry. Older versions limit the period to 14 days. Each lender decides which version of the FICO scoring formula it wants to use.

5 key factors that determine credit scores

A credit score is created using a complex formula, with various factors weighted in different ways. The score can determine what type of loan terms a lender will offer because it indicates how much risk the lender is likely to assume by making the loan.

FICO credit scores take the following five factors into account for the general population:

  • Payment history (35%): This is the most important part of your score. Lenders look at whether you have a habit of paying what you owe and making those payments on time. Late payments or missed payments will ding your score and likely make lenders downgrade their terms in offering you new credit.
  • Amounts owed (30%): Your credit utilization ratio compares how much credit you’re using with how much you have available. This is an important element in your score. Lenders are concerned if you are using a large portion of the credit available to you because it may indicate that you are overextended.
  • Length of credit history (15%): The longer you’ve been using credit, the better it is for your credit score. Three factors in this category influence your credit: how long you’ve had each of your accounts, how long you’ve had each account type and how long it’s been since you’ve used each account.
  • Types of credit (10%): Your score will be influenced by the mix of accounts you maintain, such as credit cards, retail accounts, installment loans, finance company accounts and mortgages. Generally, more variety is better for your score.
  • New credit (10%): Having too many new credit accounts in your name could suggest you are a greater risk — especially if you don’t have a long credit history. It’s not a large part of your credit score, but it’s still advisable to avoid having too much new credit (or too many hard inquiries) on your report.

When looking at your score, make sure you know what the numbers mean. FICO’s scoring formula comes with the following ranges:

Score Credit rating
800-850 Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
300-579 Poor

The bottom line

It can be frustrating and disappointing to have your credit application denied. But rest assured that this denial won’t serve as a black mark on your credit report. In fact, a denial could be just what you need to take a hard look at your score and take action to improve it, making it more likely you’ll get a “yes” the next time.


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