Does Pre Qualified Affect Credit Score?

Is it Harmful to Get Prequalified for a Mortgage or an Auto Loan?

When you are planning on investing in something big that needs financing, such as a home or a car, it will be best to first check your financing options before going out to search for a house or a car. Prequalification for a mortgage or auto loan lets the consumer know what they may afford, so they can prepare for it. However, will such prequalification inquiries affect your credit score in a way? Here is what you should know.

What Is Prequalification?

Although prequalification and preapproval appear to be related ideas, when it comes to getting a mortgage or an auto loan they are distinct.

Although it does not include a thorough credit check, prequalification provides a concept of the range for which one could be qualified. Before you start the credit application, this first check helps a lender assess your credit situation, income, existing debt, and other factors to project your financing capacity.

On the other hand, pre-approval is accomplished upon a credit check run and validation of your financial statement. This results in a loan amount more precisely for which you should be authorized upon application.

Soft Credit Checks vs. Hard Credit Checks

Prequalification and preapproval vary mostly in the kind of credit check performed.

Soft credit checks unlike hard credit checks do not affect your credit. Your credit record is easily available to lenders doing this kind of research to ascertain your creditworthiness for borrowing, but the searches are not public and do not compromise your score. Many websites offer "No effect on credit score" as long as you supply basic information to see what goods or services you could be pre-qualified for.

Full credit checks demand the lender to get your credit report from one or all of the three main credit bureaus: Experian, Equifax, and Trans Union. Many hard queries in a short time damage your credit score and make lenders see you as high-risk, which results in small penalties to your score.

How Prequalification Affects Your Credit?

The short answer: It is also important to note that getting prequalified for a mortgage, car loan or any type of financing does not impact your score. Here’s why:

Prequalification does not involve a hard credit check, but only a soft credit check. Soft checks also do not show that you checked someone and they do not contribute to your score.
It does not entail the formation of hard inquiries that would be detrimental if made numerous times but you can get as many prequalified rates from different lenders as you wish. The lenders perform a soft check to check your credit information but it does not reflect on your credit report.
Garnering benefits for comparison shopping are well reflected in the scoring models. Credit scoring: requests for a mortgage or auto loan within a short period are grouped as a single tough check if done within a specific period (depending on the model).

Although prequalification will not negatively impact your credit, possessing too much credit lin

e can harm your utilization ratio which is part of the credit score calculation. For instance, applying for several credit cards you do not require may affect your chances of approval and credit limits in the future.

On How to Minimize the Impact of Prequalification on Credit Score

If you’re worried prequalification could potentially harm your credit standing, keep these tips in mind.

Never provide your Social Security number for preapproval or for giving estimates; only provide it when you are ready to apply formally. Lenders cannot pull your full credit reports if you do not provide your SSN.
When filling in the prequalification forms, be careful. Online sites can perform hard inquiries without adequate notice. Check the listed points to avoid falling victim to their credit check policies.
Do not apply to many banks and other financial institutions for prequalification because if you receive prequalification letters, you will be obliged to apply to them for a credit report check. This is because every time the reports are retrieved, there is the possibility that errors influencing the approval decisions will be made.
Do not be pre-approved for credit cards to avoid unnecessary lists or inquiries that may affect credit scores. It stops lenders from accessing your credit details without permission while you can request rate quotes whenever you want.

The Bottom Line

Your rates and borrowing capacity check will not affect your credit if the lenders you are dealing with perform only soft pull at the pre-approval phase. However, once you go out to request financing more officially, the credit reports are pulled through hard inquiries which may lead to insignificant impacts. These dings should not build up as long as you are comparing rates within a particular period.

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