Does a loan rejection hurt your credit score? Here’s what you should know

Applying for a loan is a significant financial choice, and it is crucial to be aware of how it will impact your credit score. Borrowers are often concerned about whether a loan denial will damage their credit worthiness, and to protect and improve your financial well-being, this article examines the links between applying for a loan, being denied, and how it all relates to your credit score. ​

Understanding credit inquiries

When you apply for credit, lenders review your credit history to determine eligibility. This reference could cause your credit score to go down slightly; there is a hard inquiry that gets put on your credit report. It is important to note that the reference is only raised by applying, regardless of the outcome of the application.

Does loan rejection directly affect your credit score?

Your credit score does not indicate your loan application was accepted or rejected, as those decisions are not reflected in your credit report. If you have a lot of hard inquiries in a short period of time, the lender might consider you a higher risk borrower, and feel you are seeking credit.

Reasons for loan rejections

Knowing why you may be rejected for loans will aid in not being rejected in the future:

• Bad credit: Low credit scores usually indicate you have either a past financial mis-step which makes lenders uncomfortable approving you for a loan.
• High debt to income ratio: If a large portion of your income is currently paying other obligations, the lender might question your ability to pay another back.
• Incomplete information: If there are incorrect answers or missing responses to any of the questions on the application, the lender probably caught the inaccuracy or lack of completion.

Strategies to mitigate negative impacts

To safeguard your credit rating and ensure you are a strong candidate for a loan in the future:

1. Limit loan applications: Consider only those loans for which you qualify, and only submit a loan application for those loans.
2. Improved credit profile: By continuously paying your bills on time and continuously decreasing your outstanding balances, your credit score can increase slowly.
3. Lender's requirements: Learn and understand the exact eligibility requirements of the potential lenders you review before submission.

In conclusion, repeated applications and repeated denials can make the impact more serious, so proceed responsibly. By understanding what affects loan approval and using responsible money management you can improve your creditworthiness and improve your odds in the future for loan terms that are more favourable.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.