Does a pre-approval hurt your credit?

Does a pre-approval hurt your credit? Learn whether a pre-approval hurts your credit and how it affects your financial situation. Find out more in this informative blog post.

Does a pre-approval hurt your credit?

Understanding the pre-approval process

Before delving into the impact of a pre-approval on your credit, it's essential to understand what a pre-approval entails. When you seek a pre-approval, a lender evaluates your creditworthiness by assessing your income, debt, and credit history. This evaluation helps the lender determine how much they are willing to lend you and under what terms.

Soft inquiries vs. hard inquiries

One crucial distinction to make when discussing the impact of a pre-approval on your credit is the difference between soft inquiries and hard inquiries. A soft inquiry occurs when you check your credit score or when a lender pre-approves you without your explicit request. Soft inquiries do not affect your credit score.

On the other hand, a hard inquiry occurs when you apply for credit. Examples of hard inquiries include submitting a loan application or a credit card application. Hard inquiries can impact your credit score since they indicate that you are actively seeking credit.

Does a pre-approval result in a hard inquiry?

In most cases, a pre-approval does not lead to a hard inquiry. Typically, lenders only perform a soft inquiry during the pre-approval process. This is to provide you with an estimate of the amount you can borrow and the interest rate you may qualify for.

However, it's important to note that if you move forward with a formal loan application after receiving a pre-approval, a hard inquiry will then be performed. This is the stage where your credit score may be impacted. It's crucial to be aware of this distinction and to limit the number of hard inquiries you have on your credit report.

The potential impact on credit score

While a pre-approval itself does not impact your credit score, the subsequent formal loan application stage may result in a temporary decrease in your score. Hard inquiries generally have a minimal impact on credit scores and usually only lower it by a few points.

It's important to remember that the impact of hard inquiries on your credit score diminishes over time. After a few months, the negative effect is often negligible, and your score should recover if you continue to make on-time payments and manage your credit responsibly.

Benefits of seeking pre-approval

Despite the potential minor impact on your credit score during the formal loan application stage, seeking pre-approval offers several benefits. Firstly, it allows you to assess your borrowing capacity and gain a clear understanding of what you can afford.

Additionally, a pre-approval demonstrates to sellers and real estate agents that you are a serious buyer. It can strengthen your negotiation position when making an offer on a property, as it shows you have taken the necessary steps to secure financing. Pre-approvals can also expedite the loan approval process, saving you valuable time when purchasing a home or a vehicle.

In conclusion

To summarize, a pre-approval generally does not hurt your credit. Soft inquiries, which are typically used during the pre-approval process, do not impact your credit score. However, it's vital to be cautious during the formal loan application stage, as this is when a hard inquiry may occur.

While hard inquiries may have a temporary negative effect on your credit score, it is usually minimal and fades over time. The benefits of seeking pre-approval outweigh the potential minor impact, as it provides you with valuable insights into your borrowing capacity and can significantly enhance your home or car buying experience.

Frequently Asked Questions

1. Does getting a pre-approval hurt your credit score?

No, getting a pre-approval for a loan or credit card does not typically harm your credit score. When you apply for pre-approval, creditors usually perform a soft inquiry, also known as a soft pull, which does not have a negative impact on your credit.

2. Is there a difference between a soft inquiry and a hard inquiry?

Yes, there is a difference between a soft inquiry and a hard inquiry. A soft inquiry is a quick check of your credit report performed for informational purposes, such as when you check your own credit or when a lender pre-approves you for a loan. It does not affect your credit score. On the other hand, a hard inquiry occurs when you apply for credit, and it can slightly lower your credit score.

3. How long does a pre-approval stay on your credit report?

A pre-approval typically stays on your credit report for around 12 months. After that period, it will no longer be visible to other lenders. However, the soft inquiry associated with the pre-approval usually does not have any impact on your credit score beyond the initial few months.

4. Can multiple pre-approvals within a short period hurt your credit?

No, multiple pre-approvals within a short period usually do not harm your credit. Credit scoring models are designed to recognize when you're shopping around for the best loan or credit card terms. If the inquiries are made within a certain timeframe (usually around 14-45 days), they are typically treated as a single inquiry and have a minimal impact on your credit score.

5. What should I consider before getting a pre-approval?

Before getting a pre-approval, you should consider your financial situation and whether you can afford the loan or credit card you're applying for. It's also important to compare different pre-approval offers, including interest rates, fees, and repayment terms, to ensure you choose the best option for your needs. Additionally, remember that pre-approval is not a guarantee of final approval, so be prepared for the possibility of being declined for the full loan or credit amount.

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