Does Prequalification Hurt My Credit Score?
Whether you need a loan to purchase a home or car, or you’re in the market for a new credit card, you’ll want to take the time to see if you prequalify.
Prequalification gives consumers a way to find out what their chances are of being approved for a new loan or credit product before applying. Plus, the prequalification process generally won’t negatively affect your credit score the way it will once you formally apply.
- Prequalification typically won’t affect your credit score
- You’re not obligated to accept an offer after prequalifying
- Prequalifying doesn’t guarantee approval for a loan or credit card
What is prequalification?
A person can request prequalification before applying for a loan or credit card. To get prequalified, borrowers need to provide a few key pieces of information, such as employment status and current income and debt. This step only takes a few minutes to complete, with the results typically provided immediately after submitting the prequalification form, though some lenders may take a few days to review your information.
In some cases, you may receive a prequalification letter in the mail from a lender for things like a mortgage or credit card. However, for most products, you’ll need to either fill out an online form or speak directly with a representative from the financial institution with which you wish to do business.
Once you receive a prequalification letter, you’ll need to review the potential loan terms and interest rates to decide whether you’d like to proceed by officially applying for the loan.
Can a prequalification hurt your credit score?
A prequalification typically won’t affect your credit score. There are two types of credit inquiries that financial institutions run to determine whether a person qualifies for a loan. A soft credit inquiry, which is typically used during the prequalification process, does not affect credit scores, so there is no risk in trying to find out whether you’re at least in the ballpark for approval for a specific loan or credit card.
However, it’s usually a good idea to check before submitting anything — both to make sure you’re filling out a prequalification form and not an application and to make sure they won’t run a hard inquiry. Many lenders will clearly state on their website that getting preapproved won’t affect your credit score, but if the site isn’t clear, you can reach out to confirm.
Credit inquiries appear on your credit report anytime your credit history is accessed — by you or others. Soft credit inquiries do not impact your credit because they aren’t related to new credit applications. For example, a soft credit check might occur during employee background checks, when you’re buying insurance or when you check your own credit report.
By comparison, a hard credit inquiry occurs when a lender checks your credit as part of the loan or credit card approval process. Depending on the situation, the lender may view one, two or all three of your credit reports (Experian, TransUnion and Equifax). Hard credit checks can temporarily lower your credit score and may remain on your credit report for up to two years, though credit scores typically bounce back after just a few months.
How prequalification works
You may prequalify for certain credit cards or loans without taking any action. Many financial institutions request lists from credit bureaus on specific groups of people, such as consumers with above-average credit scores, to market their products to. The bank or credit union then sends a letter or other promotion to the individuals on the list to let them know they prequalify. When financial institutions use credit reports for marketing purposes, the activity is recorded on your credit reports, but it has no negative impact on your scores.
However, borrowers who need a credit card or loan don’t have to wait for a prequalification letter to show up in the mail. Many lenders offer prequalification tools on their websites. Online prequalification generally requires you to share some personal information. That information is used to determine which credit cards, auto loans or other products you’re eligible for.
Basic information you should be prepared to provide can include:
- Social Security number
- Employment status
- Proof of income
- Information on assets
- Information on outstanding debts
Prequalification vs. preapproval
When it comes to loans, prequalification is more of a tool for consumers to see how much they can afford to borrow. As stated above, prequalification doesn’t guarantee that the loan will be approved, though it can help potential borrowers understand their approval odds.
Like a prequalification, a preapproval doesn’t guarantee that you’ll qualify for a loan. However, because a preapproval typically involves a more in-depth review of your finances, including a hard inquiry into your credit report, preapprovals may be more accurate than prequalifications.
Keep in mind that some lenders — especially credit card issuers — may use the terms preapproved and prequalified interchangeably, so you may want to check with your lender to avoid any confusion.
When to consider prequalification
There’s no time like the present to seek prequalification. Because the process is free and it doesn’t impact your credit scores, there’s no harm in starting the process. Receiving a prequalification offer does not obligate you in any way to follow through with a loan.
In fact, by seeing the types of rates you may qualify for, prequalification could calm your nerves and boost your confidence. Seeking prequalification early, and from several lenders, can help you comparison shop for your best rates.
Just keep in mind that when you actually apply for a loan, the lender will typically run a hard credit check to verify your credit history, which will have a temporary impact on your credit scores.
What to do if your prequalification application is denied
If your prequalification application is denied, there may be some steps you can take to improve your situation. Experts recommend obtaining a copy of your credit report and reviewing it for errors and areas where you can improve. Perhaps you need to start making extra payments to reduce your debt or find a cosigner for a small loan or retail card to develop your credit history.
You’ll also want to ask the lender the reason for the denial. For example, if the lender requires two years of employment history and you only have a year and a half, you’ll know to look for another lender or wait six months before applying again. You’re entitled to free copies of your credit report each year at AnnualCreditReport.com. You can also monitor your credit score for free with LendingTree Spring.
Getting prequalified can reduce unpleasant surprises
When used properly, prequalification is a helpful tool that can reduce your chances of being surprised by a rejection or help you determine the odds of being approved for a loan or credit card.
Not only does a prequalification letter give you the information you need to decide whether you’d like to proceed with a formal application, but it can also be submitted with a real estate offer to show buyers you’re more likely to get the necessary funding to close on the property.
Obtaining prequalification is usually quick and painless, and most importantly, it won’t affect your credit score. Need help improving your credit score but not sure where to start? Learn more about credit repair.
Frequently asked questions
Prequalifying for a loan, credit card or line of credit will typically not impact your credit score because prequalification uses a soft credit inquiry to assess your creditworthiness. However, when you actually submit an application, the lender will run a hard credit check to review your full credit report, which will temporarily ding your score.
Just like other loans or credit cards, mortgage prequalification doesn’t hurt your scores because it is also based on a soft inquiry. Having your credit report evaluated is a necessary part of the mortgage process.
Prequalification is not a guarantee. While a person may prequalify for a loan, that doesn’t necessarily mean they will be approved. Prequalification is given strictly based on what the person reports, and approval odds depend on a number of factors.
During the approval process, a potential borrower’s application is examined in greater detail. Employment status, income and debt are verified during the approval process. Credit reports are also checked for things like a history of late payments or bankruptcies. If there are any discrepancies, or the lender comes across information they don’t like, a loan can be denied. This is true even if prequalification was previously granted.
Borrowers aren’t obligated to borrow the full amount they prequalify for. Instead, prequalification allows borrowers to get an idea of the maximum amount they may be able to borrow.
It’s important to look at your overall budget and determine how much debt you are comfortable taking on. Additionally, you don’t have to stick with the first lender that prequalifies you. In fact, it’s beneficial to shop around and compare loan and credit card offers before selecting the one you want to apply for. That way, you get your best rate and terms available and avoid paying more than you must in the long run.
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- What is prequalification?
- Can a prequalification hurt your credit score?
- How prequalification works
- When to consider prequalification
- What to do if your prequalification application is denied
- Getting prequalified can reduce unpleasant surprises
- Frequently asked questions
- Learn more about your credit score