For the vast majority of consumers, there comes a time in life when a new credit account is necessary. Whether it be a loan or a credit card, having access to a financing tool that allows for repayment over several months or even years can be incredibly beneficial. Although there are costs associated with credit, these are typically outweighed by the convenience of having money to cover life’s big expenses.
However, not everyone is perfectly qualified to apply and get approval for a new credit account. When a new credit card, personal loan, or another type of loan application is declined, you may be wondering if this has a negative impact on your overall credit score. The simplest answer is no, not directly, but there are indirect consequences of getting a rejection for a new credit account. Here’s what you need to know.
A Denied Credit Application Doesn’t Hurt Your Score
If you have applied for a credit card, a personal loan, or an auto loan and didn’t get the news you were hoping for, the declined credit application does not negatively impact your credit on its own. In fact, credit score calculations only take into account that an application was submitted – not the approval or denial that resulted from that application. So, directly, there is no impact on your credit score when you don’t get approved for a new credit account.
Unfortunately, there are other indirect consequences of applying for a credit account that is not ultimately approved. Lenders perform a hard inquiry into your credit history at the time an application is submitted. Hard inquiries, detailed in our article here, do ding your credit score slightly. Often, the drop in your credit score after getting a rejection from a creditor is not because of the denial, but because you have too many hard inquiries on your credit history in a semi-short period.
The best rule of thumb here is to avoid applying for multiple credit accounts in rapid-fire succession unless they are like accounts. For some credit score calculations, applications for similar credit accounts are grouped together, such as hard inquiries associated with getting an auto loan. Your credit score many still drop by a few points, but the damage is less severe than if you were to apply for several personal loans and then several credit cards in a short time-frame.
Other Factors That Impact Credit Score
Getting a rejection letter or notification from a lender that your application for credit was denied doesn’t feel great. However, there are other factors that play a more significant role in the health of your credit score than a rejection. Credit scoring algorithms focus mostly on payment history. If you have late or missed payments on any type of credit account, you’re sure to feel the sting of your credit score dropping fairly quickly.
Additionally, your credit score is based on the amount you owe compared to your total credit limits, on revolving accounts like credit cards. This is known as your utilization rate. The higher this number, the lower your credit score is going to be. It’s also important to know that credit scores are based, in part, on the type of credit accounts you have open and active. If there isn’t a strong mix of loans and credit cards, you may be penalized with a slightly lower score.
What to Do After Getting Rejected
Getting a rejection from a credit account application is not the end of the world. It is, though, essential to use the denial as a stepping stone for your overall credit health. Your best bet after getting a credit rejection notification is to understand why your application was denied in the first place. Many assume it is because they have less than ideal credit history, but verify that by checking your credit reports from the three credit bureaus. If you do have bad credit, learn what you can do to improve it over time.
Most experts suggest waiting at least six months before applying for a new credit account after a rejection. If you’re able to put in the work to boost your credit standing in that time-frame, you may be surprised what you qualify for your next round of applications for credit.