Does A Pre Approval Affect Credit Score?

Does a Pre-Approval Affect Your Credit Score?

Sometimes when you are planning to make a large purchase such as a house or a car, you may seek pre-approval of financing. Pre-approval offers a general indication of how much and at what interest rate and terms lenders are willing to offer you based on a soft credit check. But will getting pre-approval work affect your credit rating? Here are the facts you should know.

What Is Pre-Approval?

Pre-approval means a lender runs a soft credit check and assesses the credit reports to know the potential loan amount, rate, and terms they can approve for the loan. This enables you to look for homes and automobiles with your expected costs and loan approval in mind.

With pre-approval, you are not guaranteed anything – it is simply when the lender is determining your eligibility for pre-qualification, they do not pull your credit report yet. After you have identified the home or car that you want to buy, you’ll have to fill out a full loan application form and this process does involve a hard credit check.

Is Pre-Approval Based on a Hard or Soft Credit Pull?

It also does not involve a hard credit check as the pre-approval process does. Soft checks enable a creditor to look at your credit report provided they have a permissible reason to do so but it does not affect your score. Soft inquiries do not need your permission and do not affect the score though hard inquiries do affect the score though they are done only with your consent.

While looking for a home or a vehicle to buy, the full loan application is not run and you do not receive the final approval of the loan, the interest rate, and the loan fee at which you will be offered credit. Thus, pre-approval only provides approximate decisions after passing through a soft check, while the actual approval occurs after a hard check.

Is Pre-Approval Dangerous For Your Credit Score?

It is important to understand that applying for pre-approval will not negatively affect your credit score. Once again, pre-approval letters use only soft inquiries to verify an abridged credit report for you. This kind of credit check is visible to other individuals who are accessing your report but it has no impact on bringing down your score to any extent.

However, if the pre-approval process raises any red flags for the lender who is reviewing your credit history, that could be an issue on the full application. For instance, if they notice that some accounts are in collection or experience frequent payment delays. Nonetheless, those dings were already inflicting damage, finding them during the pre-approval means that nothing changes in scoring.

The only negative aspect of credit score is when one is applying for credit with many lenders. Every soft check performed by a new creditor is undeniable and using all the cards scattered everywhere seeking approval may look like one is up to something if done frequently.

Other Impacts of Pre-Approval Requests

While a single pre-approval soft check won't hurt your scores, here are some other considerations around applying.

• Other lenders who pull your credit will see the request and may be puzzled as to why you are seeking more credit. However, if you apply for a mortgage soon after, that inquiry from the pre-approval will be taken into consideration though.
• Pre-Qualification as Alternative – Some of the lenders and dealers let pre-qualify by declaring your income instead of looking through your credit at all. No check is taken, but neither do you get to verify what actual rates/terms are available to you.
• Pre-approval can also allow you to lock in a rate for 30-90 days sometimes depending on programs and lenders. It then sets a timer for doing the complete application form.
• Dealing with Denials – If you initially get denied for pre-approval, then it is time to clean credit reports, pay off balances, and wait for 3-6 months before applying again.

In most cases, it is wiser to get pre-approved before engaging in any huge financing process. Just be cautious that the soft checks involved now do not affect your score, however, you will have to agree to hard checks in the future which will have a small temporary impact. Do not apply for pre-approval from too many lenders, the recommended number should be around 3 to 5 at most.

Is Pre-Approval Worth It?

As to major purchases such as a house, it is advisable to get pre-approved. That way, it demonstrates to the sellers that you are credible and are more than capable of making a purchase. Besides, it enables you to see homes that you can afford based on the actual figures, not estimations. This makes the home shopping experience much more focused, saves your time, and makes others' position offers appealing.

As for auto purchases, it can be helpful in some cases but is not always required. People today’s dealers rarely anticipate pre-approval letters since they can also fund their customers on the spot. However, knowing the available options on financing ahead assists you in establishing realistic payment plans when comparing various vehicles. Further, the hard check dealers conduct may present worse terms than pre-approval findings of a soft check if you have a low credit rating.

The Bottom Line

The search for pre-approval only entails running soft inquiries that do not impact credit scores negatively. The discovery of existing dings during the reviews could raise eyebrows on actual loan applications that do contain hard hits on the formal underwriting of terms. Only use pre-approval checks in circumstances where big money financing is required and do not apply to many institutions. Although not as detrimental as having no soft credit checks, frequent soft checks can also raise eyebrows with other potential creditors in the future.

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