How Loan Applications and Credit Inquiries Affect Your Credit Score

Applying for a loan can be a daunting process, especially if you’re unsure how it might impact your credit score. At O1ne Mortgage, we understand the importance of maintaining a healthy credit profile. In this article, we’ll explore how loan applications and credit inquiries affect your credit score and provide actionable tips to improve your chances of loan approval.

Does Being Declined for a Loan Affect Your Credit?

When you apply for a loan, the lender typically checks one or more of your credit reports and credit scores. This process results in a hard inquiry on your credit report. If your loan application is denied, the inquiry will remain, but the lender’s decision will not appear on your credit reports. Therefore, a declined loan will not directly impact your credit scores.

Understanding Hard and Soft Inquiries

Your credit report includes two types of inquiries: hard and soft. Soft inquiries occur when you view your own credit report or when a lender with whom you already have an account checks your credit report as part of an account review. These inquiries do not affect your credit scores.

Hard inquiries, on the other hand, are related to credit applications you have made. While they may affect your credit, the impact is usually minimal and temporary. 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 as a result. 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. Multiple hard inquiries within a short timeframe from the same types of installment lenders are typically counted as one inquiry in most credit score calculations.

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 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 and provide a list of the reasons or risk factors that contributed to the decision.

The first step you should take 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.

How to Avoid Being Declined for a Loan

If your loan application was denied due to poor credit, consider some of the many 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 as soon as possible 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 that you’ll be approved for credit, take a look at 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.

At O1ne Mortgage, we are committed to helping you achieve your financial goals. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074. Our team of experts is here to assist you every step of the way.