When planning to apply for your next credit card, have you considered what will happen if you get a denial?
No one likes to think about being denied credit. The truth is, it happens, and it's best to know how it affects your future prospects for credit cards and loans.
One effect a denial can have is on your credit score. It can lower your score for a short time, but it doesn't have to derail your future plans. Here's how credit checks play a role in your credit and what you can do to minimize the effect before your next credit application.
Hard credit inquiry versus soft credit inquiry
When you, a lender, or a company accesses your credit report, it's called an inquiry or "pull." An inquiry may be made for any number of reasons, including checking for fraud or seeing if you're qualified for a loan or credit card.
A hard inquiry (hard pull) requires your permission and can affect your credit score. It's mostly used to determine your creditworthiness for a credit application. You would know if someone was doing a hard inquiry. Lenders may look at your credit report, not just your score, and see this inquiry as a sign you are looking for more credit. It could flag you as a higher-risk customer.
A soft inquiry (soft pull) doesn't require your permission each time. It's used to prequalify you for credit offers so lenders know if you might be a good fit for their loans or credit cards. Some insurance companies, employers, and landlords may use a soft inquiry to see if you meet specific financial or credit requirements.
How hard inquiries impact your credit score
If hard inquiries do impact your score, how much does it matter? The exact number of points your credit score could drop after a hard pull varies because it depends on a combination of factors. Your score could also drop for more reasons than just the hard inquiry.
For example, if you requested a hard inquiry as part of a credit card application and approval, your score could drop from:
- The hard credit inquiry
- A change in the overall age of your credit accounts once approved
- A change in the age of your newest account once approved
Any effect on your score from the pull alone (and not the other factors of account age) will typically be temporary and resolve itself after a year. The inquiry will stay on your credit report for up to two years.
Products and cards that use soft credit checks
Looking to access credit or learn about your credit score without the harm of a hard credit pull? These services and tools can help.
- Secured credit cards — These cards typically don't require a hard credit check when you apply. Popular options include cards from major banks and credit unions that offer secured credit products. They work by having you pay a cash deposit equal to the amount of your credit line. You can borrow against the cards and pay the money back each month to build a credit history. Since you're not borrowing money like with a traditional credit card, there's less risk and no need for a hard credit pull that can harm your score.
- Credit score apps —Many tools like Equifax's credit tools can show your credit score along with tips for raising it. While you'll have to provide your personal information and social security number to give the tool access, the service doesn't do a hard inquiry to update your credit profile. Using this information can keep you informed of any financial fraud or credit mistakes so you can fix them promptly.
- Existing banks and lenders —If you already have a credit card with certain financial companies, they will continually check your credit to make sure you're a good fit for their services and to decide your annual percentage rate (APR). A sudden drop in your score could cause the lender to raise your rate. An increase could cause them to extend you more credit. Soft credit checks help lenders serve you better while also protecting them from unnecessary risk.
Tips for safer credit card applications
No one wants to have their credit score drop, but it's a natural consequence of applying for credit. These tips can help you get a "yes" on your next credit card application and even potentially minimize the harm to your credit score over time:
1. Know and build your credit ahead of time
There's no way to completely avoid a small dip in your score after applying for credit. Knowing this, you should check your score ahead of time so you know your score. If you're just a few points shy of the next credit level (such as "good" or "very good"), you might want to work on your score and build it a few points. This way, it can handle a small dip from the hard pull without going into a lower credit category.
2. Use pre-qualification tools
Some lenders give you a chance to see the credit limit and rate available to you based on pre-qualification information from a soft credit check. This won't harm your score and can give you an idea of your approval odds before you submit your application and give permission for a hard inquiry.
You may not always get the same deal or answer as what's shown in your pre-qualification offer. That's because pre-qualification (or pre-approvals) aren't a guaranteed. The lender may see additional details in your credit report that they didn't see when doing the soft credit check. The only way to know for sure if you're approved is by permitting the hard inquiry and completing the official application.
3. Pick the right cards
Think carefully about the type of credit card you want so your application (and hard credit check) truly counts. Things to ask yourself include:
- Do I want rewards or cashback programs?
- What kind of credit limit do I need?
- Is the interest rate within my range?
- Are there any card benefits, such as rental car coverage, purchase protection, or travel services, that I prefer?
Only apply for cards that match your credit profile. You can gauge your approval odds by:
- Checking the card's typical credit score requirements - Most cards require scores between 650-700 for approval
- Using pre-qualification tools when available - Major issuers like Chase, American Express, and Discover offer free pre-qualification tools
- Comparing your credit profile to the card's target audience - Premium rewards cards typically require excellent credit, while secured cards are designed for those building credit
- Reviewing your credit report for any issues that might affect approval
If you've received a pre-approval offer, this could be a clue to what you qualify for. It's not the only way to learn about cards, and you should do a comparison before you finalize your application for the hard credit check.
What to do if you're denied a credit card
If you've done your research and know which cards you are most likely to get, you might not have to apply more than once. However, it's always wise to have a short list of cards so you know what to do if you're denied. While you may not get the "OK" for your first pick, you could apply for a second card — just leave plenty of time for your credit score to bounce back from the hard inquiry. It could take up to a year to completely resolve.
Credit reporting agencies like Transunion suggest "rate shopping" for car and home loans. This strategy allows you to apply for multiple loans at once, so you can compare the actual offers that come back from the banks.
Does this lower your credit score? Yes, because each lender does a hard pull, it does temporarily drop your score. Because you apply within a short, 14-day period, it lowers your score in the same way as if you only applied for one loan.
However, this strategy doesn't apply to credit cards. Each card application has a separate effect on your score, and multiple applications and hard pulls can lower your score significantly. A better approach is to apply for the best card for your situation. If you don't get approval, patiently wait for your score to come back up before applying again for a different card. This could be a few months but no more than a year.
How to work on your score for next time
If you were rejected for a card, it could be due to many factors, including your income or credit score. Your rejection letter may give you more details.
To boost your score for the next application, consider these tips:
- Check your credit report and correct any errors you see.
- Pay bills on time. Ask your cell phone company, landlord, or utility company if they will report your on-time payments to the credit bureaus.
- Lower your credit utilization by paying down balances on existing cards.
Remember to wait at least a few months to a year for your credit score to bounce back from the first credit card application. You'll want your score to be as high as possible before you reapply.
Minimizing credit card denial impact
Applying for credit is part of your financial life, but it doesn't have to impact your overall credit profile very much. Just research, plan ahead, and apply to the card that's perfect for you. This will help to minimize harm and help your score bounce back quickly for the next time you need to apply for new credit.
