Does Being Denied for a Loan Hurt Your Credit Score?

Being denied credit probably hurts your feelings, but that is pretty much the only thing that happens after a rejection. You could cause significant damage if you refuse to accept that you might have bad credit and stop applying for new loans before rebuilding your score. In some cases, extra applications do not hurt your score and are a good move.

Identification

A denial for credit does not affect your credit score nor do the credit bureaus track such data. The only harm that comes from applying for a loan and receiving a rejection is the hard inquiry. When lenders request your credit history because you applied for a loan and consented to a credit check, the bureaus note this and it takes a few points off of your score. Considering the range of the FICO model -- 300 to 850 -- a single inquiry barely makes a difference to a score.

Potential Damage

You might not accept a denial and keep applying for loans. This could cause as much damage as anything else on a credit report, because once you get past six hard inquiries you have an eight times greater chance of declaring bankruptcy, according to the Fair Isaac Corporation. However, some loans carry a tradition of the borrower shopping around and putting in several applications. The credit bureaus count all inquiries for student or car loans and mortgages in a 45-day period as one inquiry.

Improving Credit

When a lender rejects your application, you probably have some negative information in your profile. Check your own credit report, which should list all of your negative items and debt burdens in the summary section. Always eliminate debt if possible and assume that negative items are your weak areas. Automatic bill pay usually prevents missed payments unless you do not have enough money left in your bank account. The worst offenses, such as bankruptcy and foreclosure, can take years to recover from.

Tip

The Dodd-Frank Wall Street financial reform bill passed through Congress in 2011 and one provision gives consumers the right to see their credit report and credit score if a lender rejects them based on a credit reason. As of March 2011 the regulations are not final, so consumers must wait until the Federal Trade Commission issues final rules for the bill to exercise this clause.