Can Getting Turned Down for Credit Lower Your Credit Rating?

Your credit score is an important part of your financial health. Your credit score determines the difference between a high interest rate or a low one, or whether you can get credit at all. It is important that you pay close attention to your credit score and be careful about how you handle the credit you already have.

Credit Score

Your credit score is a three-digit number used to determine your creditworthiness.This number is also referred to as your FICO score. According to the Consumer Federation of America, credit scores range from a high of 850 to a low of 300. Your score is based on factors such as payment history, the amount of credit you have, your employment history, the number of new inquiries for credit and your total amount of debt. Late payments, charge-offs, bankruptcies and late mortgage or rent payments all have a negative impact on your credit score. On the positive side, making timely payments, managing your credit card balances and keeping your rent or mortgage current maintain or improve your credit score.

Credit Agencies

Three credit reporting agencies, Experian, TransUnion and Equifax, calculate your credit score. Each agency maintains a file on anyone who has a credit history. It is possible for your credit score to vary among agencies, because not every business with whom you have an account reports to all three agencies. For example, Equifax and TransUnion might have your mortgage and car note, but not your student loans, whereas Experian could have your student loans and credit cards. All three agencies jointly operate the website annualcreditreport.com as part of the Fair and Accurate Credit Transactions Act, legislation that entitles you to receive a free copy of your credit report each year from each agency.

Credit Inquiries

Each time you apply for credit, the potential creditor runs your credit report. This is called a credit inquiry. Inquiries have a negative impact on your credit score, lowering it one or two points for each kind of inquiry. For example, if you apply for a credit card, a mortgage and a car loan at the same time, each of the inquiries will deduct points from your FICO score. Whether you are approved or denied credit is not a factor on your credit score; the inquiries cause the lowering of your credit score. However, if you apply for a car loan from three different places, this only counts as one inquiry, because, although there are three inquiries, they are for the same type of credit.

Avoiding Negative Impact

All inquiries for the same type of credit made within 30 days are lumped together as one inquiry. So, if you plan to apply for several types of credit, either complete them all within the same 30 days and take the total hit once, or spread the inquiries out so each inquiry is in a different 30-day period. According to the MyFICO website, if your credit score is good, the impact of the inquiries will be less than if you have blemished or damaged credit. Also, if you are denied credit for any reason, you are entitled to a free copy of your credit report. This does not include the free report you are entitled to under the Fair and Accurate Credit Transactions Act.