Will Loan Rejection Affect My Credit Rating?

Getting denied for a loan can be disappointing But you may be wondering – how does a loan rejection actually impact your credit rating and score? The good news is, a rejection itself doesn’t directly hurt your credit However, there are some key things to understand about how the loan application process interacts with your credit profile.

Does a Loan Denial Appear on Your Credit Report?

When you apply for a loan the lender will review your credit report and score to help inform their decision. But if they deny you the loan, this decision does not get noted on your credit report. Your report simply shows a record of the “hard inquiry” the lender made when checking your file. It does not document whether you were approved or denied.

So rest assured, you won’t see any evidence of that loan denial on your credit history. Even if you are approved, that approval may not necessarily translate into a new account. For example, you might get approved for multiple auto loans when car shopping, but only move forward with one. Or you could change your mind after reviewing a loan offer you previously applied and got approved for. In any case, the outcome of the application itself (approved or denied) does not appear on your report.

Hard Inquiries Will Be Visible

While the denial isn’t documented, the hard inquiry the lender made when reviewing your credit does appear. This inquiry will be visible on your report for 2 years.

Hard inquiries can have a minor negative impact on your credit score. Each inquiry may lower your score by fewer than 5 points according to FICO. However, the impact diminishes over time, and FICO will stop factoring the inquiry into your score after 12 months.

If you rate shop and apply with multiple lenders in a short period of time, you may accumulate several hard inquiries. But FICO and VantageScore have special rules to minimize the scoring impact of rate shopping for certain loan types:

• FICO: For auto, student, and mortgage loans, FICO combines all hard inquiries within 14 days (45 days for older scoring models) into a single inquiry. FICO also ignores inquiries within the past 30 days.

• VantageScore: VantageScore has a 14 day rate shopping window but combines inquiries across more loan types including credit cards and personal loans. However, there is no 30 day buffer.

So while visible on your report, responsible rate shopping will have a reduced influence on your scores.

How to Rebound After a Loan Rejection

Here are some tips for getting back on track after a denied loan application:

Review the adverse action notice. Federal law requires lenders to send you an adverse action notice explaining why you were denied credit. They must also provide instructions for obtaining a free copy of the credit report they used. Review this notice closely to understand what factors led to the denial.

Dispute any errors. Thoroughly review your credit report from the lender for any inaccuracies. If you find mistakes, submit disputes with the credit bureaus to correct the errors. Inaccurate information could unjustly cause a denial.

Pay down balances. If high credit utilization is an issue, focus on paying down your balances. Getting balances below 30% of the credit limit can help improve your scores.

Become an authorized user. Ask a family member or friend with excellent credit to add you as an authorized user on a credit card. This can give your credit profile a boost.

Apply with other lenders. Each lender has its own approval criteria. With strong credit, you still may qualify for a loan with more favorable terms from another bank.

Give it time. If your credit profile needs work, wait a few months and let your scores recover from the hard inquiry before applying again. Continue paying all bills on time.

Monitor your credit. Keep a close watch on your credit reports and FICO Scores. This will allow you to track your progress and catch any suspicious activity.

With perseverance and diligently building your credit, you can overcome a previous loan denial. Just remember – the rejection itself does not directly hurt your credit standing despite feeling discouraging. Follow these steps and continue practicing good credit habits, and your scores will be back on track in no time.

Frequently Asked Questions About Loan Rejections and Credit

Here are answers to some common questions regarding how loan rejections interact with your credit:

Does a loan rejection appear on your credit report?

No. Lenders do not report whether applications are approved or denied. Only the hard inquiry from the application appears.

Does a denial directly affect your credit score?

No. The denial itself does not impact your score. However, the hard inquiry may cause a small, temporary drop.

How much does your score decrease from a rejection?

Typically less than 5 points according to FICO. The impact is minor and disappears after 12 months.

Will multiple rejected applications hurt your credit?

Multiple hard inquiries in a short span can have a larger negative influence. But FICO and VantageScore limit the impact of rate shopping.

What happens once you are denied credit?

The lender must send an adverse action notice explaining why. Review this notice carefully and check your credit reports for accuracy.

How long do hard inquiries from rejections stay on your credit?

Hard inquiries remain on your credit report for 24 months, but only affect your credit score for 12 months.

What’s the best way to recover from a denial?

Pay down debts, become an authorized user, apply with other lenders once your credit improves, monitor your reports closely.

How can you check your credit reports?

You can obtain free annual credit reports from Experian, Equifax, and TransUnion at annualcreditreport.com. Some credit cards also provide free access to your reports.

Getting rejected for a loan can be disappointing. But take heart knowing the denial itself doesn’t directly harm your credit. Monitor your reports, manage credit wisely, and your scores will be back on track in no time even after a rejection.