Does Getting Rejected Affect Credit Score?

How does Rejection Impact Credit Score?

A credit score is one of the key elements that influence the approval of a credit application. It gives them an idea of how consistently they have repaid their previous debts and whether one is capable of repaying new debts or not. Most individuals are concerned about the impact of being rejected by a loan or credit card on their credit score. However, does rejection indeed impact credit rating?

What is a Credit Score?

A credit score is a numerical representation of a borrower’s credit rating and is a figure between 300 and 850. One of the most used credit scores is the FICO score. FICO scores take into account five main factors.

Credit history – whether you make your payments on time. This makes up 35 percent of your score.
Credit utilization ratio – how much of your total credit limit you are currently utilizing. This makes up 30% of your score.
Credit history length – it measures the number of months of credit history your credit records reveal. This contributes 15 percent of your raw score.
The amount owed- this is the total amount owed on your credit file which includes credit cards, loans, mortgages, and others; this counts for 10% of your score.
Recent credit history – credit card checks and accounts that have been opened in the past month or so. These contribute 10% of your total score.

The higher the credit rating, the more favorable the interest rate and other conditions of the credit will be. A majority of scores lie in the fair to very good bracket ranging between 580 and 740.

Credit Checks vs Credit Inquiries

Whenever you apply for a new credit, the credit reporting agency performs a credit check to see your credit report and score. This is reported on your credit report as a ‘’hard inquiry’’. Hard inquiries have a way of slightly reducing your credit score though this is usually not very significant. So, as long as you have a history of proper credit utilization, one or two new ‘hard inquiries’ should not greatly harm your credit score.

If you are rejected for the credit account, it does not result in yet another hard inquiry. The inquiry has already taken place. The only thing that is appended to your report is whether you have been approved or rejected for that application. So merely getting rejected does not impact it any further decreasing your score.

Is Rejection a Path to a Lower Credit Score?

Just being rejected for a loan or credit card is something that cannot in any way lead to the reduction of your credit score. As highlighted above, the credit check has already taken place irrespective of the approval or denial of the credit.

However, certain indirect ways of getting rejected could lead to credit score damage over time.

Multiple Unsuccessful Applications: If you respond to the rejection by applying for several more new credit accounts within a short time, all those new credit checks could pile up, and your score will drop slightly. When taxpayers submit too many inquiries, it appears that they are in desperate need of funding and this is not good for lenders.

Changes in Credit Utilization: Sometimes, the refusal of new credit accounts can impact the credit mix and the utilization rate as well. The following are some of the factors that dictate your score. For instance, if you are rejected for a new credit card, you lose the possible addition to your total available line of credit. If you have any balances, that available credit could be lost which may increase your utilization ratio.

Late Payments: Several of the applicants who are denied loans or credit cards may fail to make their repayments on their bills because they were relying on the newly sought credit. Payment delays drastically affect credit rating. This means that even a single 30-day late payment can reduce your score by over 100 if you have a good history.

Loss of Credit Mix: If you are rejected severally for a similar category of credit accounts, for instance, auto loans or mortgages, you may not create a sound credit mix. Credit scores are higher for individuals with several installment loans and credit card revolving facilities.

Psychological and Behavioral Effects: Some studies have indicated that rejection leads to feelings of anxiety, anger, or helplessness. These emotions may well lead people into financial dire straits, or to make bad money decisions. Nonetheless, more research is required on the relative links between rejections and financial behaviors.

There Will Be No Immediate Change Even After a Single Rejection

In other words, one credit denial should not significantly affect the score or credit approval the next time round. If you have been paying several other credit accounts properly for years, most scoring models can handle one rejection without significant score fluctuations.

This is not an indication that one should go for massive credit limits and apply for credit in large proportions at one time. Do not stop paying your bills on time. This means that if you continue a responsible credit profile one denied application should not and must not alter your financial reliability or worthiness. Check your credit reports from time to time. However, if the score is steadily declining after experiencing rejections severally, one might have to check his/her budget and credit practices to be on the right path again.

Getting a loan to start up a business or to purchase a house might be quite a daunting task especially if you have been turned down in the past.

If you have been denied many credit applications recently, take steps to strengthen your score before trying again.

All the bills that are owing, should be paid in full from the next billing cycle.
This means that consumers should reduce credit card balances to decrease utilization.
Co-signer, the credit account or become an authorized user
If you require more accounts, then you should open a secured credit card.
New applications should NOT be more than one in a year or preferably 5 in a year at most.
Review reports to determine reasons that contributed to score reduction

Everyone will have a different story to tell as to why they got rejected. It is advisable to fix any flaws reflected in your credit history before applying for a credit card again. With time and effort, rejections should not permanently bar one from getting the credit one needs.