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When you apply for a loan, a lender will generally assess the risk you pose as a borrower before approving or denying your application. This risk assessment includes reviewing one or more of your credit reports and credit scores. When a lender accesses your credit report, what is known as a "hard inquiry" is added to your reports.
An inquiry simply records that your report was accessed. If your loan application is ultimately denied, the inquiry will remain, but the lender's decision will not appear on your credit reports.
Learn how hard inquiries can impact your credit, and what steps you can take if your loan application has been denied.
Credit Denials Do Not Show Up in Your Credit Report
In addition to personal information such as any names you've used with lenders, current and former addresses, and your date of birth, consumer credit reports contain a wealth of information about your relationships with lenders. This includes account balances, credit limits, loan amounts, payment histories as well as two types of inquiries—hard and soft.
Soft inquiries show up when, for example, 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 for a loan or credit card. Soft inquiries do not have any impact on your credit scores.
Hard inquiries, on the other hand, are related to applications you have made for credit or services. They may have some impact on your credit, although it is temporary and usually minimal.
Both hard and soft inquiries are automatically removed from credit reports after two years.
Credit reporting agencies such as Experian are not notified about whether your application for credit is approved or denied, so credit reports do not maintain a record of credit denials. Nor do they include a record of credit approvals, for that matter. But those who review your credit report can see who else has done the same for lending purposes. Lenders and credit scoring models may view frequent inquiries as increasing a borrower's credit risk, whether or not the inquiries result in a new account on a report.
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. So, for example, if you applied for an auto loan with Chase on June 20, 2020, then you'd expect to see a "Chase Auto" inquiry on or about that date.
The scoring models published by VantageScore® and FICO® both consider hard inquiries in their calculations and may ding your scores as a result. But you shouldn't assume that all hard inquiries will have a measurable impact—some may, some may not. If your credit scores are affected, the impact of an individual inquiry is minimal. Further, even though hard inquiries may remain on your credit reports for up to two years, credit scoring models do not see or consider them for that entire period of time.
The impact of multiple hard inquiries is minimized if they're conducted in a short period of time from the same types of installment lenders. Multiple inquiries from the same types of lenders, such as mortgage, student loan or auto lenders, are generally caused by a consumer shopping around for the best interest rates and terms and will be counted as one inquiry in most credit score calculations.
Do FICO® and VantageScore Consider Hard Inquiries Differently?
Of all the risk factors in both credit scoring systems, credit inquiries play the smallest role. 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 are the "least influential" of all scoring metrics.
Since rate-shopping is expected, both models take steps to account for it:
- FICO® ignores auto, student loan or mortgage inquiries that are less than 30 days old. After 30 days, those inquiries are considered in score calculations but are viewed together as one inquiry for scoring purposes if they appear on your report within the same 45-day period.
- VantageScore counts inquiries that occur within 14 days of one another as a single inquiry.
Both scoring models ignore any inquiries that are older than 12 months. Soft inquiries are never considered when calculating a credit score.
What to Do if Your 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 the reason or reasons 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. This information is meant to help you better understand why your application was denied.
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. Lenders must provide instructions for requesting a free report from the credit bureau they used in the adverse action notice they send to you. Looking over your credit report can help you better understand your credit situation, including your risk factors, and hopefully help you devise a strategy to improve your scores.
You can also check your FICO® 8 credit score based on Experian data for free. 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 the age of your credit report.
How to Improve Your Credit Before Applying for New Loans
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. There is, however, some general advice that does apply to everyone.
The most important thing you can do is avoid negative information from being reported on your credit reports by making all of your scheduled payments on time as agreed. 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) is a very important factor in both FICO® and VantageScore models, and reducing your debt balances can help you make progress toward higher scores.
Credit Rejection Isn't a Mark Against You
A credit card or loan rejection will not be recorded on your credit report, nor will it directly impact your credit scores. Credit applications will likely result in a hard inquiry, but their impact, if any, is usually minor and will not be considered by credit scoring models after one year.
To improve the chances that you'll be approved for credit the next time around, you may want to take a look at improving your credit. For example, if high credit card balances are holding back your credit scores, you may want to consider taking out a consolidation loan and paying off your credit card debt. This will not only result in a lower utilization ratio, but you can also convert high-interest credit card debt to less-expensive installment debt.
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™† tool. Boost adds on-time payment history for accounts that otherwise wouldn't show up on your credit report, and may improve your scores instantly.