By: John Tunningley
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Readers often ask, “what happens if I’m denied after submitting a credit card application?”
Everyone is worried about what effect a denial will have on their credit report. The short answer is it has very little effect, but I know the devil is in the details and you want to know exactly what happens when you’re denied.
Your Credit Score
First, let’s looking into the details of what factors influence your credit and help to determine your credit score.
The first, and biggest, credit factor is your payment history. This factor is determined by things such as late or missed payments, bankruptcy, tax liens, collections, etc. These can have a very negative impact on your credit score. Unfortunately, too many people in the US rack up credit debt with no way to pay it back.
This can not only kill your credit score but also makes the points and miles hobby almost useless as the interest you will be paying on credit cards will outweigh the benefits you’re receiving from any given credit card. It is important to make sure you are always paying off your credit card balances in full each month to get the most bang for your buck in this hobby.
The second major factor of your credit score is how much you owe which is referred to as your credit utilization. This often holds people back at first before they understand how it works. Generally, banks report how much of your credit line you have used to all three credit bureaus—Equifax, Experian, and TransUnion—when your statement closes.
This particular factor is important because this is usually why your credit score recovers quickly after a credit card approval. If you carry a minimal balance even $5 with one credit card open with a $5,000 credit line and are approved for another credit with a $5,000 credit line your utilization goes down and your available credit goes up often leading to an increase in your credit score.
The third factor in your credit report that has a “medium” impact is the credit age. This can be improved by finding someone who is willing to add you as an Authorized User to one of his or her older credit cards if you don’t have any credit in your name.
Other factors that have an effect on your credit report include the types of credit accounts and credit inquiries. Both of these have minimal impacts on your credit report but for the purposes of understanding what a credit denial does to your credit score we’re going to focus on hard inquiries—when the bank pulls your credit report and determines whether they will approve you for a card.
(Almost) Every time you apply for a new credit card or any other type of credit line your credit will be pulled. Some lenders, bank accounts, and services like Credit Karma use soft pulls which have no effect on your credit. However, car loans, home loans, personal loans, some bank accounts (Charles Schwab in particular), and credit card applications will result in a hard pull on your credit report.
Because Credit Inquiries only make up about 10% of your credit score these have a very minimal impact on your score. Often, after submitting an application, you will notice your credit score drop a couple of points. This is often insignificant because your credit score falls into a range and that range is how your credit approval and interest rates are determined.
Unless the couple of points puts you in a different range there will be little to no effect on your day to day life and your next application for a loan or credit card. Long story short, this is the only impact of a denial.
That’s right your credit score is not affected by the denial at all.
It may go down a couple of points because of the pull but the denial itself has zero effect on your credit score and so those few points your score may drop sum up the entire effect of a credit denial on your score.
You shouldn’t let the fear of a potential denial prevent you from applying for a new card. There are a few rules you should be aware of like the Chase 2/30 rule, Chase 5/24 rule, Bank of America’s new rules, and the American Express limitations to prevent unnecessary denials but in the long run the denials won’t have any real effect on your credit score and you’ll miss out on some great opportunities if you live in fear of the dreaded denial.
When you apply for a new card, your score will always drop a few points but this is nothing to worry about. If denied, it’s important to know that nothing else will change with your credit report. If you’re approved, your score will often recover as your number of accounts will increase and your credit utilization will decrease.
Similar to closing a credit card, the effect a denial has on your credit is often overstated by tons of people who don’t necessarily know what they’re talking about. The truth is that a denial doesn’t really hurt anything but your ego; it just doesn’t come with the positive effect of an approval that allows your score to recover quickly after a hard inquiry.