Being denied a credit card or other type of credit doesn’t affect your score because it’s not reflected in your credit report. However, a hard inquiry triggered by a credit application can temporarily lower your score by a few points, regardless of the result.
But wait – as they say in the late-night infomercials – there’s more! What may hurt your score is if the card issuer ordered a full copy of your credit report (a hard inquiry), which is likely. This inquiry will show up on your credit report for two years and will have a (probably small) impact on your score for a few months.
How small is small? It’s about five points, but other factors could come into play. The more positive history in your credit file, the less the impact will be. If you have what is known as a “thin file,” or a credit report with only one or two trade lines and not a long history of using them, you may find the impact larger and longer-lasting.
Your credit report shows that you applied – but not that you were denied
Here’s how it works: Your credit report only reflects that you asked a lender for additional credit. Your credit report picks this information up once the creditor makes a hard inquiry of your credit file.
Your credit report does not capture whether you were rejected or accepted for the new credit card. The result is that your score is effectively blind as to whether the loan was ultimately declined or approved and does not ding you more if rejected than if you were accepted in your score calculation.
All else in the credit file being equal, a hard inquiry resulting from a card application that was declined will have the same impact on your score as a hard inquiry resulting from a card request that was approved.
See related: Why does a hard inquiry hurt your credit score?
Why the credit score impact of an inquiry is so small
A quick review of FICO’s credit scoring factors will show you where the negative impact comes from and why it is usually small.
The goal here is to pay your bills, as agreed, on time, every single time. If you do that, your score will reflect that good behavior. The payment history piece of the credit scoring pie is worth 35% of your total FICO score.
This is how much of your available credit you are using at one time. Your goal here is to keep that number under 25% to get the best score. The closer to zero you can get here the better. Credit utilization is worth 30% of your FICO score.
Length of credit history
This refers to how long you have had your accounts. This is one of the only factors that you cannot control. You can only have your accounts as long as you have had them. It’s that simple. And this is where many of those with thin files are hurt as they try to improve their score.
There are ways to mitigate the damage here; the best way is to not close accounts you’ve had for some time even if you don’t use them much. This is especially true of your oldest accounts. And you also have to have some patience.
The types of accounts you have – like credit cards, car payments, mortgages – make up your credit mix, which is worth 10% of your total FICO score. If all you have is a fistful of credit cards, you may have a lower score than you think you should have. Creditors like to see that you can handle multiple types of financial obligations with both fixed and variable payments, which is why this is part of the formula.
One remedy here is to take out a small installment loan or even a passbook loan. Just be sure that if you do this it will be reported to the credit bureaus.
This factor is also worth 10% of your FICO score. It is where those hard pulls or inquiries come into play.
The only way for most of us to get new credit is to ask for it. For many consumers, if they apply and receive the credit they may see that small (five points or so) dip in their score for a few months. But depending on the amount of credit granted, they might see only a quick dip and then a rise, like two dancers twirling around on the credit dance floor. This is because the points for utilization will have gone up as a larger amount of credit is now available.
However, if you are rejected for the credit you will not see that particular dance move come into play. And you may also find that the dip is more than five points or so. But again, your score should bounce back after a few months of otherwise good credit behavior. Remember, it’s not the rejection that counts; it’s the asking that does it.
You should also know that your credit report lists your inquiries, and they stay on there for two years. However, FICO only looks at inquiries over the past 12 months in its scoring algorithm.
My advice for anyone looking to obtain new credit is to first check your report and score so you know exactly where you stand and for what you can reasonably expect to qualify. Clean up any errors you find and know where your problem areas are so that you can address those prior to applying for new credit.
Use CardMatch to help you find cards you may be preapproved for before you leap into an application that may be denied. This way you won’t have to endure a dip in your score without at least the benefit of the new credit.
Remember to keep track of your score!